4A —March 18 - April 21, 2022 — Financial Digest — M id A tlantic Real Estate Journal
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1031 E xchange
By Louis J. Rogers, Capital Square Section 1031 Tax- Deferred Exchanges
t r e a tme n t under Sec- tion 1031 of the Internal R e v e n u e Code? Any rea l p r o p e r t y held for in- vestment or W
hat kind of proper- ties qualify for tax- deferred exchange
shopping center, and un- developed property, such as land, a farm or ranch. Effective January 1, 2018, personal property does not qualify for exchange treat- ment under Section 1031. What kind of properties do not qualify for tax deferral under Section 1031? Your principal residence and personal use property do not qualify for Section 1031 treatment. There is a special tax provision under Section 121 that provides forgiveness (exclusion) of gain on sale of your principal residence but the amount of gain forgiven
is limited to $250,000 for a single taxpayer and $500,000 for a joint return. In highly appreciated areas, this may not be sufficient. What documents are need- ed to convert a taxable sale into a Section 1031 exchange? An Exchange Agreement with an accommodator or qualified intermediary (QI) should be signed before clos- ing. The taxpayer has right up to the moment of closing the transfer to convert a “sale” into an exchange. Do I need a qualified inter - mediary or accommodator to hold the sales proceeds?
Yes; this is required to qualify for a safe harbor un- der the regulations. Taxpay- ers should use the safe harbor for qualified intermediaries to avoid technical defaults in structuring an exchange. Is it expensive to set up an exchange with a QI? No; inexpensive – the basic fee is only approximately $1,000 for a simple exchange. Who is the proper party to sign the exchange agreement with the taxpayer? The “owner” for tax pur- poses signs the exchange agreement. Typically, the person or entity “on title” is
the taxpayer who should sign the exchange agreement. Be careful with LLCs and partnerships that have a tax identification number (TIN) and file a partnership tax re - turn; in that case, the entity (LLC or partnership) is the taxpayer who should sign and not the members of the LLC or partners. The sole exception is a single member limited li- ability company or SMLLC; that is a disregarded entity for tax purposes. In the case of a SMLLC, either the entity or the sole (100%) owner of the entity can be the tax- payer who signs the exchange agreement for the taxpayer. In a Section 1031 exchange, is my gain deferred or for- given? For how long? Section 1031 defers the gain that otherwise would be recognized; Section 1031 does not forgive the gain. But you may exchange over and over and over again, creat- ing almost perpetual deferral during your lifetime. Many taxpayers use Sec- tion 1031 to build family wealth in real estate dur- ing their lifetime. When the taxpayer dies, the heirs get a “step up” in tax basis to fair market value. That means the heirs should be able to sell without have taxable gain. So, while Section 1031 de- fers the taxable gain, the gain can be deferred for a lifetime and may be forgiven on death. This is whimsically called “swap until you drop” Loui s J . Rogers i s founder and chief ex- ecutive officer of Capital Square , where he oversees the firm’s Delaware statu - tory trust (DST) programs for investors seeking quali- fying replacement property for Section 1031 tax-deferred exchanges and regular (non- exchange) investors. Rogers also provides invest- ment banking services for owners. He is a nationally recognized authority in struc- turing securities offerings for real estate investments and serves as a consultant and expert witness on Regula- tion D private placements, non-traded REITs, Section 1031 exchanges, DST and TIC programs, real estate funds, and issues related to broker-dealers and registered investment advisors. MAREJ
Louis J. Rogers
use in a trade or business. This means all types of real estate qualify, whether de- veloped property, such as a rental house, apartment building, office building, OR
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