1031 Exchange | BREG - Brokers Real Estate Group, Inc 1031 Exchange | BREG - Brokers Real Estate Group, Inc

1031 Exchange

The delayed exchange is a very special investment technique, which can be used in real estate transactions involving properties held for investment purposes. You are allowed to sell your property today and to reinvest the profits as long as six months later without having to pay the taxes due on the sale. Taxes are deferred to a future date that you choose. The 1984 Tax Reform Act provided Congressional approval of the concept of delayed exchanging by requiring that the investor identify his like-kind trade property within 45 days and completes the exchange by 180 days after the sale of his property. The 1986 Tax Reform Act increased capital gains taxes and is responsible for a rapidly growing interest in the use of delayed as well as simultaneous exchanging.

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The delayed exchange procedure was brought to the attention of the real estate community when an investor by the name of T.J. Starker and his family attempted to trade timberland to the Crown Zellerbach Corporation in exchange for a promise to deliver suitable trade properties to the Starkers in the future. The I.R.S. challenged this transaction and after a series of tax court trials, the 9th Circuit Court of Appeals ruled in favor of Mr. Starker. The I.R.S was not happy. As recently as March of 1988 they stated that the appellate decision applied only to Mr. Starker and that the widespread use of delayed exchanges may create problems for many investors. However, Regulations issued in 1991 validated the use of the delayed exchange on a national basis. The delayed exchange is entirely legal, defensible, and has been used thousands of times over the years.

An investor in real estate understands how important it is to preserve wealth and assets. In the frequently changing world of taxation, the investor is fortunate to have IRC Section 1031. This tax code allows the investor to exchange from one investment property to another and defer taxes on the gain. This means that a 1031 Exchange is a rollover of equity of like properties, rather than an avoidance of tax. Thus the investor continues to build wealth through real estate investment, and maintains the hard earned equity. Any tax liability through inheritance will be limited to the gains from the date of the inheritor’s acquisition, not during the years of ownership. So in essence the taxes that are saved now are never paid.

• Taxpayer finds a buyer and sells the property through a Qualified Intermediary.
• Taxpayer buys a replacement property through the Intermediary.
• The parties may not know each other and their properties can be in different states.
• The exchange period begins on the day the relinquished property is transferred and ends on the earlier of 180 days thereafter or the due date (including extensions) of the tax return for the taxable year in which the transfer of the relinquished property occurs.
• The taxpayer’s agent, broker, attorney, accountant or family member is excluded as a qualified intermediary.


Current Market Value





$ 80,000


Current Market Value




Original Purchase Price
Depreciation Taken




Taxable Gain on Sale





Tax on Gain at 20% = $14,000 – Other expenses/loses could affect the gain (A property can be sold for less than purchased for and still have a gain)

WITHOUT A PROPERLY EXECUTED 1031 EXCHANGE: Equity ($120,000) less tax ($14,000) = $106,000 available towards purchase of a new property.

WITH A PROPERLY EXECUTED 1031 EXCHANGE: If the tax-deferred exchange of the property was properly executed, TAX WILL BE DEFERRED and the investor will have $120,000 to use towards the purchase of another investment property.

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The concept of a tax deferred exchange is easy to understand. However, there are many details involved in an exchange that need careful consideration. Before taking steps towards a 1031 tax-deferred exchange, please consult your CPA, attorney, or tax advisor and Real Estate Agent.