Section 1031 Exchange
What it is:
How it works/Example:
For example, let’s assume that John Doe wants to sell his commercial property for $600,000, which he bought for $400,000 as an gain that is taxable.
If John does a section 1031 exchange, he can defer this by replacing the property with a “like-kind” property: another property that is similar in nature to the one he is selling. However, if John sells his property and more than 45 days goes by without obtaining a replacement property, John may be subject to the , as well as a state . To speed things up and ensure compliance, he can contact a qualified intermediary and make a qualified exchange accommodation arrangement. The qualified intermediary is similar to an escrow company in that it transfer John’s property to the buyer and transfer the replacement property to John.
By using a qualified exchange accommodation arrangement, an “accommodation party” holds John Doe’s property temporarily (or it can hold the replacement property temporarily). It is named as principal in the sale of the property and the later purchase of the replacement property.
Why it matters:
A section 1031 exchange basically allows an investor to defer a capital gain or loss on the sale of if the investor exchanges it for a “like-kind” property. By using a qualified exchange accommodations arrangement, an investor is able to avoid touching the proceeds from the sale of a property before the proceeds are reinvested, thus helping avoid paying any capital gains and assisting in the transaction.