1031 Tax Deferred Exchange Oddities

Atlas Real Estate Advisors  /   September 14, 2023

1031 exchanges offer more than just tax deferral; they can be integral to strategic planning, whether you’re navigating a failed exchange, considering a reverse exchange, or planning for the future. Understanding these tools and how they fit into your broader investment strategy is crucial. 1031 exchanges allow real estate investors to defer capital gains taxes by reinvesting the proceeds from the sale of a property into a “like-kind” property. This strategy can be a powerful tool for building wealth and optimizing your investment portfolio.

What About a Failed Exchange?

Even if a 1031 exchange doesn’t go as planned, there can still be tax advantages. For example, if a sale occurs late in the year and the funds are held by a qualified intermediary past December 31 without a replacement property being acquired, the tax liability may be deferred until the year the funds are actually disbursed. This allows flexibility in managing taxable events and cash flow.

Exploring Reverse 1031 Exchanges

A Reverse 1031 exchange allows investors to purchase a new property before selling the old one. In this structure, the investor buys the replacement property first and then has 180 days to sell the relinquished property. This approach can be beneficial when a desirable property becomes available before the current property is sold. As always, it’s essential to work with a qualified intermediary and ensure all IRS guidelines are followed to maintain the tax-deferral benefits.

Leveraging 1031 Exchanges for Estate Planning

One of the often-overlooked advantages of 1031 exchanges is their role in estate planning. When an investor passes away, the heirs inherit the property at its stepped-up basis, which is the fair market value at the date of death. This means that the deferred capital gains taxes are effectively eliminated, as the heirs are not responsible for the accumulated gains. This strategy, sometimes referred to as “swap ’til you drop,” can be a valuable tool for passing on wealth to the next generation.

Final Thoughts

If you’re looking to explore how 1031 exchanges can work for you, Atlas Real Estate Advisors is here to assist. Our team can guide you through the complexities of these transactions and help you make informed decisions that align with your financial goals.

*** Always speak to a certified tax professional before initiating any transaction that may have tax-related implications.