How Does A 1031 Exchange Work?
Updated: May 4
If you’ve ever purchased or sold property, you may be familiar with the term 1031 exchange. A 1031 exchange is a tax law that applies to real estate transactions. It affects how and if taxes are paid as a result of selling a property. Certain real estate transactions are eligible for a 1031 exchange under specific requirements and stipulations.
What is a 1031 exchange? Here’s what you need to know about this important tax law before entering into a real estate transaction.
How Does a 1031 Exchange Work?
A 1031 exchange allows investors to sell property and defer paying taxes on the sale by investing the profits into another property that is considered to be “like-kind.” Simply put, “like-kind” means anything that qualifies as real estate. It doesn’t necessarily have to be the same quality or even the same type of property. But in order to qualify for a 1031 exchange one property must be exchanged for another within the United States.
Transactions that Qualify for a 1031 Exchange
Here are just a few examples of real estate exchanges that would qualify:
The sale of a residential property in exchange for land.
The sale of a residential property for a commercial property.
The sale of commercial property in exchange for any other real estate.
The sale of raw land in exchange for developed land or property.
The sale of oil and gas royalties in exchange for a ranch property.
The sale of a rental property for another type of rental property.
Transactions that Do Not Qualify
The following are some examples of real estate transactions would not qualify for a 1031 exchange:
The sale of a property in the U.S. in exchange for property outside the U.S. or vice versa.
The sale of property in exchange for stocks, bonds, or securities of any type.
Goodwill of one business in exchange for goodwill of another business.
The Role of the Title Company in a 1031 Exchange
A title company can take on a variety of roles in real estate transactions. The primary role is usually to conduct a title search to ensure that the seller has the legal right to sell the property, and to provide title insurance in case there is an encumbrance.
In a 1031 exchange, the title company can serve as a qualified intermediary. This is usually viewed as an additional duty under the role of escrow agent. During a real estate transaction, the escrow agent and qualified intermediary can hold the funds temporarily between the sale of one property and the purchase of another until the paperwork is finalized and the transaction is legal. By working with an escrow agent the seller is able to defer paying taxes on the sale profits during the transition period.
A title company can also provide financial advice and assistance throughout a real estate transaction. The exchange of real estate can be complicated and mistakes can be costly. Working with a title company can make the process go more smoothly.
American Guardian Title is Your Trusted Advocate
Real estate transactions are significant financial undertakings. American Guardian Title works on your side to make the process easier and more financially sound. We can be your title agent, escrow agent, and qualified intermediary among other roles in your real estate transaction. If you have questions about whether or not the sale and purchase of property qualifies for a 1031 exchange, we can help you make the right decision to ensure the greatest possible tax savings.
Contact us today to learn more about 1031 exchanges and other real estate matters.