A like kind exchange lets gain on an investment property be deferred rather than recognized at the sale. It works only if it is set up before the sale, and it runs on a clock that does not negotiate.
By far the most common way a Section 1031 exchange fails is that the seller closed first and asked about it afterward. Once the sale proceeds have been received, the structure that makes deferral possible is no longer available. The exchange also runs against fixed periods set by the Internal Revenue Code, and those periods start whether or not anyone has begun looking for a replacement property.
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When investment or business real property is exchanged for other like kind real property, and the exchange is properly structured under Internal Revenue Code Section 1031, the gain is deferred, not forgiven. It is a timing benefit, and for an owner who intends to keep reinvesting it can be a large one. It is not a way to take cash out of a property without consequence.
02
The mechanics matter. A qualified intermediary, an exchange agreement signed before closing, and sale proceeds that never come into the seller's hands are the ordinary shape of a forward exchange. Getting that sequence right is most of the work, and it has to happen while the sale is still ahead of you.
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The replacement property has to be identified in writing within a period the Code sets, and acquired within a second one. There are rules about how many properties may be identified and about what happens when the plan changes. This is where an exchange most often comes apart, and it is worth planning for before the first closing.
04
An exchange sits on top of an ordinary purchase and sale, so the purchase agreements, the title work, the financing and often an entity question all still have to be handled. Running the exchange in the same firm that is running the transaction removes a coordination problem that otherwise lands on the client.
The same order every time, because most of the expensive mistakes in this area come from doing step four before step two.
The single most useful step. The structure has to be in place before the relinquished property closes.
Qualified intermediary engaged, exchange documents prepared, and the sale contract adjusted to fit.
Replacement property identified in writing inside the Code's period, with the alternatives thought through in advance.
The replacement purchase closed through the exchange, with the paperwork that proves it was done properly.
For real property the definition is broader than people expect: an apartment building and raw ground can be like kind to each other. What matters more is that both the property sold and the property acquired are held for investment or for productive use in a trade or business.
A personal residence is not investment property, so the ordinary exchange rules do not reach it. Mixed use situations exist and depend entirely on the facts, so that is a conversation and not a web page.
A forward exchange is normally structured through one, because the seller receiving the proceeds is the thing that defeats the deferral. We work with the intermediary. We do not act as one.
The Code sets fixed identification and acquisition periods, and they are shorter than most people assume. We will give you the exact dates for your transaction instead of a general figure, because getting that wrong is the expensive mistake.
Your accountant should absolutely be in the conversation. The exchange also has to be documented and the transaction structured, which is legal work, so in practice the two run alongside each other.
A commercial deal is a legal document sitting on top of a building, a loan and a title history. The document is the part people read. The other three are where the money usually goes.
Most of what a business attorney does is unglamorous and cheap compared with what it prevents. An operating agreement written while everyone still likes each other is an afternoon. Written afterward, it is litigation.
Most people meet a real estate attorney once, holding a contract on the largest purchase of their life, with no particular reason to trust anybody else in the room.
The rest of the practice is on the practice areas index. If you would rather judge the firm by who trusts it than by how it describes itself, look at who it works for or at who would actually be handling this.
Call 765-423-1001 to schedule an appointment, or send the details through. Bring the contract, the deed, or just the question.
Contacting Gambs, Mucker & Bauman does not create an attorney-client relationship, and nothing on this site is legal advice. Please do not send confidential information until a written engagement is in place.