A common misconception about 1031 exchanges is that they can only be conducted in one manner – a sale and then a purchase through a third party facilitator. In fact, 1031 exchanges have evolved to include numerous tax strategies and structures.
Here are a few of the many ways to conduct a like-kind exchange:
Simultaneous and delayed exchanges
Historically, the exchange of properties always occurred on the same day. Following the Starker decision in 1979, however, “delayed exchanges” became the norm. Now the purchase of replacement properties generally take place sometime after the relinquished property’s closing.
A “reverse exchange” occurs when a replacement property is purchased and closed on before the relinquished property is sold. This permits an investor who has the financial resources to purchase a new property to benefit from the delayed sale of their relinquished property and take advantage of the ups and downs of the real estate market.
The benefits of IRC 1031 can also be utilized when improvements need to be made on a replacement property before it is received. Improvements may consist of repairs or of entirely new construction. To benefit from tax-deferred treatment, all improvements must be completed within 180 days or the investor risks being faced with a new property that is not of the same or greater value than the relinquished property – and with building materials that may be classified as “boot” subject to immediate taxation.
1031 exchanges involving partnerships
Most 1031 exchanges nowadays involve partners that hold property jointly. It is not uncommon for a partner to want to dissolve their interest in a property held by the partnership. However, buying out that partner runs the risk of triggering substantial tax liabilities. There are a few options available to partnerships in cases where the partners’ respective interests diverge:
- Drop and swap. This involves the liquidation of the partnership interest in the property, which is then converted into an interest in the property as tenant-in-common with the partnership. The property is then sold, with each partner (and former partner) choosing whether or not to move forward with a 1031 exchange.
- Swap and drop. A “swap and drop” is the reverse of a “drop and swap.” The partnership completes an exchange and then distributes its interest in the replacement property to the exiting partner.
- Split-off. With a split-off, the partnership provides the departing partner with title as tenant-in-common, and the rest of the partners complete a 1031 exchange as a partnership. The departing partner can then cash out or exchange their tenant-in-common interest in the property.
1031 Exchange Lawyers in San Francisco
Real estate investors retain our services to ensure that they are maximizing their benefits from both a real estate and a tax perspective – they understand how crucial it is to hire 1031 exchange professionals who are experienced and proficient in both areas. The California real estate and tax attorneys at Moskowitz, LLP can help you facilitate a successful 1031 exchange. We also provide expert representation with all types of tax audits, including audits in connection with 1031 exchanges. To learn more, call our San Francisco office.