Your Chicago 1031 Exchange Attorney 

Whenever you hear the term “1031 exchange,” the speaker is referring to Section 1031 of the Internal Revenue Code. A 1031 exchange is also known as a “like kind” or “Starker” exchange. It is a tax-deferment strategy used to make a real property transaction non-taxable. In short, it allows a property owner to use the profit made from the sale of property to buy another “like kind” property without having to pay any capital gains taxes on the sale of the first property. 

“Like Kind” Stipulation Explained

The actual wording of Section 1031 of the Internal Revenue Code says that the property must be “of like kind which is to be held either for productive use in a trade or for business investment.” While the majority of real estate properties will qualify under this definition, a Chicago 1031 exchange attorney can help with specific questions. 

Types of 1031 Exchanges

There are four different types of 1031 exchanges: 

• Delayed Exchange: Within 45 days of the sale of the original property, the owner must have identified up to 3 potential properties that are of a “like kind.” Typically, the owner is allowed an additional 135 days from that point to follow through with the purchase of the new property. This is the most common type of 1031 exchange, and requires a Qualified Exchange Intermediary to hold the proceeds of the sale while the new property is acquired.

• Reverse:  A reverse exchange occurs when the owner acquires the replacement property prior to the sale of the old property. These types of 1031 exchanges require the use of an exchange accommodation titleholder. 

• Simultaneous: A simultaneous 1031 exchange is when the owner sells the old property and buys the new at the same time. 

• Construction: This type of 1031 exchange is for new construction or renovated properties. They are still subject to the 180 day time rule. 

1031 Facts & Requirements

• The properties must be located in the United States. 1031 exchanges do not work on foreign properties. 

• 1031 exchanges do not apply to primary residences.

• In order to take advantage of the capital gains tax break provided by a 1031 exchange, you must own the property sold in full. 

• Replacement properties may not exceed 200% of the value of the property sold. 

• In order to avoid any capital gains tax, the new property must have the same, or greater, net market value and equity of the property that is being sold. 

• There is no limit on how many 1031 exchanges you may have. Because of this, investors are able to grow their portfolio without being unduly burdened by taxes.

• Due to the high minimum investment required for 1031 exchanges they are typically utilized by persons with a high net worth. 

Speak With a Chicago 1031 Exchange Attorney

If you are interested in learning more about how a 1031 exchange can help you avoid having to pay capital gains taxes, you need to speak with a Chicago 1031 exchange attorney at the Law Office of Alexis Hart McDowell. Book a consultation at Enterprise Esquire to get the process started.