Why You Need to Know about the 1031 Exchange Program

Overview

It’s not often that people get excited when you talk about the IRS. In fact, most people’s eyes glaze over a bit at tax talk. But the 1031 Exchange program is such a powerful tool that it deserves some lively conversation.

Basically, a 1031 Exchange, which is unique to real estate, allows a property owner to sell an asset and not recognize the gain on the sale as long as they reinvest the proceeds into a new property. Like anything related to the tax code, it has lots of ins-and-outs and rules that must be followed to make it work, which is why at Bonaventure we’ve become experts in the nuances of 1031 Exchanges. We’ve got tools and widgets to facilitate the process.

One of the key components to building wealth is tax efficiency. Real estate offers a great opportunity to build wealth and this tool adds to that opportunity by making it extremely tax efficient.

Here’s how it works: When you sell a property (called the relinquished property), you have 45 days to identify the property you want to buy (called the replacement property). Then you need to close on that new property within 180 days from the time you sold the relinquished property.

That sounds simple, right? But it can get pretty complex to meet all the rules, especially for a property with multiple owners.

Besides the timeline, the main requirement is that you exchange real estate for real estate. It can be any kind of real estate, too. You can sell an office building or a retail site and buy an apartment building or sell land and buy a vacation property for rental income.

Another requirement is that the price of the replacement property must be equal to or more than the value of the relinquished property. In addition, there must be the same or more debt on the replacement property.

For example, you could be a landlord who owns and manages a $1 million triplex and you’re getting tired of “toilets, tenants and trash”. We can move you from that situation into an institutional quality asset. You can buy an entire building or you can do a fractional exchange and buy $1 million of a $50 million or $100 million Class A apartment that’s institutionally managed and owned.

Our focus has always been on long-term tax-efficient compounding. The 1031 Exchange is a valuable mechanism that helps people maximize their total return. Our expertise with this program and with apartments provides people with the means to move out of active management while remaining invested in one of the largest, most liquid and most stable asset classes in real estate.