While most investors do know what an IRS 1031 is and what the major benefits are, many do not realize that there are also some lesser known advantages to this code. One of the additional benefits is a reverse exchange, which is a relatively recent development that allows investors to purchase a replacement property and then sell their existing property within 180 days. However, since the investor may not actually hold the title to both properties simultaneously, a Qualified Intermediary will hold the title to one of them, making this kind of exchange more expensive than a standard 1031 exchange. This can be advantageous in a market where properties are selling quickly, as potential replacement properties identified in the standard forward exchange are snapped up by other buyers.
If an investor buys a replacement property of lesser value that the one being sold, then this is called a partial exchange and the investor must pay the relevant tax on the difference in property values. This type of 1031 properties exchange provides flexibility for investors who only want to reinvest part of their capital gains into new, “like kind” property.
Other properties that may qualify under the IRS 1031 include properties owned in the United States, such as a TIC (tenant-in-common) investment property where a large group of investors each own a part of a commercial building. Water and mineral rights along with oil and gas investments may also qualify under the 1031 like kind property exchange.
There are also times when foreign exchanges are considered to be “like kind” properties, such as when the investor exchanges a foreign property for another foreign property. For instance, exchanging a French property for a Canadian property would be allowable, whereas exchanging a U.S. property for a Canadian property would not.
Another way to qualify for the IRS 1031 code is through improvement exchanges, also known as build-to-suit or construction exchanges. This enables investors to buy a replacement property of lesser value than the one they are selling. A Qualified Intermediary holds the title to the replacement property and the investor then has 180 days to improve the value of the property to achieve the value required for full tax deferral.
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