What is a 1031 Exchange?
An overview of 1031 exchange rules
A 1031 exchange, named for the relevant section of the Internal Revenue Code, is a tool that allows landowners and real estate investors to defer capital gains tax by exchanging one type of property for another. Most commonly, this is accomplished by using a qualified intermediary (like Great Plains 1031,LLC) to sell property to one party and use the proceeds to purchase replacement property from a different party.
To fully defer taxes, you generally must purchase as much property as you sold and use all of the proceeds from the sale of your property. For example, if you are selling a section of land for $1,000,000 and a lender is owed $500,000 on the property, you will need to purchase $1,000,000 or property and put down at least $500,000 at the closing of the replacement property. Of course, the $500,000 proceeds must be held by a qualified intermediary in between the sale of your relinquished property and the purchase of your replacement property. If you purchase less property than you sold, or if you take any cash proceeds from the sale of your relinquished property, those amounts are generally taxable. The taxable amount is referred to as “taxable boot.”
There are many 1031 exchange rules that must be followed to defer capital gains. One of the most important rules is that you are not allowed to be in receipt of the proceeds from selling the relinquished property — you are only allowed to receive the replacement property purchased with those funds.
While the general rules may seem simple, there are many complex rules that may apply in your particular situation. As such, it is always recommended that you discuss your 1031 exchange with your accountant, CPA, or tax advisor before beginning the exchange.
In most cases, replacement property must be identified within 45 days of the sale of the relinquished property and the 1031 exchange must be fully completed within 180 days of the sale.
To comply with 1031 exchange rules in most situations, you will need a qualified intermediary like Great Plains 1031 to hold the proceeds of the sale and then use them to purchase the replacement property on your behalf.
In exchanges involving family members or in certain states with specialized 1031 exchange rules, extra caution is needed in how you approach the transaction.
How our
process works
Our goal is to make the 1031 exchange process simple and smooth. Whether you’re exchanging family-owned land or commercial properties, our team is here to walk you through each step and answer any questions along the way.
The process below applies to most standard exchanges, also known as forward exchanges. Others types of exchanges may require additional steps, but our team is always here to guide you through the process.
We’ll discuss the process, talk about your specific transactions, and answer any questions you have about a 1031 exchange.
When you’re ready to sell your property, our team sends instructions to the title company to make closing an easy process for you. Prior to (or at) closing, you will execute an exchange agreement that officially “hires” Great Plains 1031 as your qualified intermediary.
The closing of your sale will proceed mostly as normal, but all proceeds from the sale (after payment of any debts and expenses) will be placed into a 1031 account to be held until the acquisition of your replacement property.
After your property is sold, you have 45 days from the closing of that sale to identify replacement property to be purchased as part of the 1031 exchange. There are specific rules for how many properties can be identified, the type of property that can be identified, and who must receive the identification. Great Plains 1031 is here to work with you and your advisors to make sure your identification of replacement property is done correctly.
Replacement property must be purchased within 180 days from the closing of the sale of your relinquished property. Great Plains 1031 will provide closing instructions to the title company prior to closing. At closing, Great Plains 1031 will advance any 1031 proceeds being held, and the replacement property will be deeded directly to you.
After replacement property is acquired, the exchange must be reported by your accountant or CPA on your next income tax return. This is done by completing IRS Form 8824 and including it with your income tax return. This step is not completed by Great Plains 1031, but we are happy to help answer any questions that arise when the exchange is reported.
Get in touch with our team
Our team at Great Plains 1031 has extensive experience facilitating 1031 exchanges for Oklahoma real estate investors and landowners. We work closely with your team of tax and legal advisors to ensure that your 1031 exchange is successful.
Contact us today to schedule a free consultation.