Tips for a Successful 1031 Tax-Deferred Real Estate Exchange

The IRS has defined several black and white areas dealing with a 1031 tax-deferred real estate exchange, however there are many more gray areas which are difficult to elaborate on unless you have detailed questions about your own exchange. We highly recommend that you seek specific tax advice from your tax advisor or attorney. To be a qualified intermediary (accommodator), we must remain an independent third party to your transaction and cannot act in any way as your real estate agent, tax advisor, or attorney.

We do consider ourselves a team by working closely with your real estate agents, tax advisors, attorneys, escrow officers and lenders. At Pioneer 1031 Company our consultations are free of charge, whether by phone, email, or in person.

  • The related party problem creates a two-year mandatory holding period if you buy from or sell to a related party (actual relatives and controlled entity).
  • When you sell real or personal property, be aware about the recapture of any prior depreciation. Part of your gain may be taxes as a capital gain and qualify for the maximum 15% rate on long-terms gains. However, part of the gain that is related to depreciation will be recaptured at a maximum 25% rate. You can use our Capital Gains Calculator to arrive at an estimate of your capital gain tax and depreciation recapture amount. That tax liability could be deferred by using a tax-deferred exchange.
  • A dealer trap occurs when you develop land. You may lose 1031 opportunity if the IRS determines that the land is strictly inventory.
  • A partnership pitfall prevents an individual partner seeking to exchange his interest in the partnership's r.e. assets for like-kind real estate he wants to acquire in his name individually. Therefore, a partnership's interest is not eligible exchange properties. However, the partnership itself can exchange partnership property.
  • The reverse exchange occurs when a taxpayer acquires the replacement property before selling the relinquished property. When you build, you are limited by the 180-day period. In addition, you cannot exchange into an improvement built-on-land that you already own.
  • Seller Carry Back financing can be taxable on the "Installment Sale Basis." If, as the Seller/Exchangor, you chose to have the note payable to you at closing. But the carry back can be included in the exchange and qualify for tax deferment if the exchange and closing are set up correctly. We suggest that you contact us to discuss the possibilities. Then place the next call to your accountant for their guidance.