What is a 1031 Exchange in Commercial Real Estate?
When an investor or developer sells a commercial property, they usually have to pay taxes then and there, but not always. An IRS 1031 exchange is a transaction that allows a commercial property seller to defer paying taxes on the sale of the property if they use the funds to buy another, similar property within a specific period of time.
Who can use a 1031 exchange?
Individuals, S corporations, C corporations, trusts, LLCs, and other groups are eligible to request a 1031 exchange for the purpose of deferring their tax burden until later. However, it's important to realize that 1031 exchanges are designed for the exchange of commercial property. As a result, personal homes and vacation residences may not be eligible. In addition, the seller cannot simply use money from the sale of the first commercial property to purchase the second commercial property; the two deals must be part of the same legal transaction (at least in the perspective of the IRS.)
Can you get extra time to complete a 1031 exchange?
Yes, in some cases, you can. One type of IRS 1031 exchange, known as a reverse exchange, allows investors to identify and purchase the similar property before selling the initial property they want to exchange. Investors can do this by hiring an exchange facilitator, often known as an exchange accommodation titleholder (EAT), a legal intermediary who holds the titles of one or more of an investor's properties while they complete the 1031 exchange.