1031 Exchange Services for Commercial Properties

How Are 1031 Exchanges Used for Commercial Property?

Individuals, S-corporations, C-corporations, trusts, LLCs, and other investor groups can use a 1031 exchange on commercial property to defer capital gains taxes to the IRS, provided they are similar and exchanged within a specific timeline. Commercial properties must also be of greater or equal value to the relinquished property.

Property owners cannot simply use the money gained in the sale of the first commercial property to purchase the second commercial property. Exchanges must be part of the same legal transaction. Utilizing a 1031 exchange allows you to avoid paying taxes now when today’s dollar is worth more than tomorrow’s. You can also elect to exchange properties indefinitely, acquiring increasingly profitable commercial properties and continually avoiding capital gains taxes. The IRS outlines diverse types of 1031 exchanges you can use to accommodate different scenarios:

• Delayed exchange: The relinquished property is sold first, and the new property is purchased within 180 days.
• Simultaneous exchange: The sale and purchase of both properties occur on the same day.
• Reverse exchange: Property is purchased prior to selling the relinquished property.
• Improvement exchange: Use the proceeds from the sale to make improvements on the replacement property.

What Are the Rules of 1031 Exchanges for Commercial Property?

The IRS has strict rules that must be followed to make 1031 exchanges compliant and successful, which include:

• Properties exchanged must be of “like-kind” – similar in nature or character.
• New properties must be identified within 45 days of the sale of the initial property and purchased within 180 days.
• A QI must perform the exchange.
• Titles to property cannot be held by two people simultaneously.
• Replacement/exchange properties must be worth equal to or more than the original property.
• If the original property holds debt, the new property must acquire at least the same amount of debt.
• Any leftover cash from the 1031 exchange is taxed as personal income.
• Any reduction in debt with the new property will also be taxed as personal income.

Additionally, 1031 exchanges apply only to domestic property within the United States and cannot be exchanged for international properties or vice versa. The selling and purchasing property owners must be the same person. You must also report 1031 exchanges to the IRS when filing your tax returns for the year exchanges take place, detailing the exchange’s properties, timelines, and structure.

What Types of Commercial Properties Are Eligible for a 1031 Exchange?

Commercial properties must have an improved structure to be depreciated and usually include some amount of land. Both may appreciate in value to trigger a gain when sold. 1031 exchanges can be used with many different types of commercial properties, such as:

• Agricultural land
• Apartments
• Churches
• Convenience stores and gas stations
• Golf courses and practice ranges
• Healthcare facilities
• Hotels and motels
• Industrial property
• Marinas
• Mixed-use property
• Nursing homes
• Office buildings
• Parking garages and lots
• Self-storage units
• Retail centers
• Shopping centers and strip malls
• Theaters
• Undeveloped land
• Warehouses

How Do I Identify Replacement Properties?

Qualifying properties must be held for investment or business purposes, not personal use. The IRS provides three rule options for identifying properties to exchange:

• Three-property rule: Identify up to three properties regardless of market value.
• 200 percent rule: Identify more than three properties with a combined fair market value no higher than 200 percent of the relinquished property’s value.
• 95 percent rule: Identify an unlimited number of properties provided the purchased property is worth at least 95 percent of the identified properties’ value.

Are There Risks Associated with a 1031 Exchange for Commercial Properties?

The main risk associated with a 1031 exchange is that you must purchase a replacement property within a certain period of time, and the IRS is strict about those deadlines. If you fail to purchase the replacement property before the deadline, you will be liable for paying the taxes on the original sale.

Additionally, the replacement property must be of equal or greater value than the original property, and you must reinvest all of the sale proceeds from your original property into the replacement property. If you do not, you must pay taxes on the difference.

How Can 1031 Federal Exchange Help Me?

At 1031 Federal Exchange, we assist commercial property owners with all aspects of 1031 exchanges, from crafting effective tax strategies to managing the entire exchange process and providing sound guidance on tax options and compliance. We work closely with clients to ensure seamless coordination and valuable support in structuring exchanges. We also provide detailed instructions and exchange documents to escrow or title companies to ensure transactions meet the necessary legal and tax requirements.

Our services include safeguarding funds, maintaining key records, and facilitating smooth property transactions. We establish arm’s length agreements between sellers and QIs, hold sale proceeds in separate insured accounts during the 45-day identification period, and transfer funds to title or escrow companies for purchasing replacement properties. Additionally, we ensure accurate record-keeping, convey titles via deed, and provide all necessary tax forms to investors and the IRS, offering a complete and compliant 1031 exchange experience.

Maximize Tax Benefits and Increase Commercial Property Investments with 1031 Federal Exchange Today

1031 Federal Exchange helps commercial property investors maximize the benefits of a 1031 exchange tax deferment. To learn more about our services and discuss your options, call 513-488-1135 or contact us online to schedule a free consultation. Located in Loveland, Ohio, we serve clients nationwide.