10 — September 2025 — 1031 Exchange — Financial — M id A tlantic Real Estate Journal
www.marej.com
1031 Exchange By Michael W. Hurwitz, CPA, MST, Withum Tax Planning with Internal Revenue Code Section 1031
A
deferred exchange un- der Internal Revenue Code (“IRC”) Section
foreign property is allowable. • Use of a Qualified Inter - mediary (“QI”) is necessary. The taxpayer must not receive the proceeds from the sale. Instead, a QI holds the funds and facilitates the exchange. • The taxpayer must iden - tify potential replacement properties within 45 days of transferring the relinquished property. This identification must be in writing and deliv- ered to a QI. There are three rules a taxpayer can use to satisfy this requirement. The taxpayer may identify up to three properties regardless of value (the Three-Property Rule), any number of proper - ties as long as their combined value does not exceed 200% of the relinquished property’s value (the 200% Rule), or more than three properties, even if their total value exceeds 200% of the relinquished property; however, the taxpayer must acquire at least 95% of the total value of the identified properties to qualify. • The replacement property must be received within 180 days of the transfer (the Ex- change Period) or by the due date of the taxpayer’s return (including extensions), which - ever is earlier. In competitive markets or when timing constraints arise, taxpayers may need to ac- quire the replacement prop - erty before disposing of the relinquished property. This structure is known as a reverse exchange, and it is governed by Internal Revenue Procedure 2000-37. Because the tax - payer cannot hold title to both properties simultaneously and still qualify under IRC Section 1031, the transaction must be structured using an Exchange Accommodation Titleholder (EAT) as opposed to a QI. The EAT temporarily holds title to either the relinquished or replacement property in a “qualified parking arrange - ment” until the exchange is completed. Reverse exchanges are more complex and typically more expensive than standard deferred exchanges, but they offer critical flexibility for in - vestors navigating tight time- lines or financing constraints. Crucial elements of a reverse exchange include: • EAT Ownership: The EAT takes legal title to one of the properties and enters into a Qualified Exchange Accommodation Agreement
with the taxpayer. • 180-Day Completion Win - dow: The taxpayer must com- plete the exchange within 180 days of the EAT acquiring the parked property. • Identification and ex - change periods still apply, and the transaction must be carefully documented to meet IRS standards. Compliance with IRC Sec - tion 1031 allows a taxpayer to defer recognition of gain until the replacement property is ultimately sold in a taxable transaction. This deferral can span decades and allows for continued reinvestment of un- taxed equity. If the taxpayer receives non-like-kind proper- ty (e.g., cash, mortgage relief, non-real estate assets), this is considered “boot” (derived from an Old English word meaning something given in addition) and may trigger partial gain recognition. A gain is recognized to the extent of boot received. To avoid boot, taxpayers should reinvest the full sale proceeds into the re- placement property. Any cash taken out or debt not replaced may trigger partial taxation. The tax basis of the replace- ment property is generally the same as the relinquished property, adjusted for boot and other factors. This “carryover basis” affects future depre- ciation and gain calculations. Choosing replacement proper - ties with high depreciation po- tential can further enhance tax efficiency. Properties that allow for accelerated depreciation can offset future income and reduce taxable gains, making them es- pecially attractive in a deferred exchange strategy. Exchanges between related parties are subject to addi - tional scrutiny and may be disqualified if either party disposes of the property with- in two years. For long-term planning, taxpayers may also consider leveraging the “buy- borrow-die” strategy. By con - tinuing to exchange properties and borrowing against their equity, investors can access liquidity without triggering taxable events. Upon death, heirs receive a step-up in basis, potentially eliminating deferred taxes altogether. Key strategic actions and considerations for real estate professionals and tax advisors include ensuring clients under- stand the strict timelines and documentation requirements,
coordinate with QI’s and/or EAT’s early in the transaction process, evaluate whether a reverse exchange structure is appropriate based on market conditions and financing needs, and consider the long-term implications of basis carry- over, depreciation recapture, and future exit strategies. By mastering the intricacies of
IRC Section 1031 exchanges, professionals can help clients preserve equity, enhance port - folio flexibility, and defer sub - stantial tax liabilities thereby transforming a routine trans- action into a powerful wealth- building opportunity. Michael W. Hurwitz, CPA, MST is a partner at Withum. MAREJ
1031 offers real estate investors a strategic method to defer rec- ognition of capital gains taxes when disposing of
Cushman sells Sicklerville, NJ Dollar General to 1031 buyer
Michael W. Hurwitz
investment or business-use property. This powerful tax deferral mechanism allows for continued reinvestment of equity and portfolio growth without immediate tax con- sequences. The Tax Cuts and Jobs Act of 2017 significantly narrowed the scope of IRC Section 1031 by limiting its application to real property only. As a result, exchanges involving personal property, such as equipment, artwork, or vehicles, no longer qualify. For professionals advising clients in real estate transac- tions, understanding the me- chanics and tax implications of both deferred and reverse exchanges under IRC Section 1031 is essential. The code provides that no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for in- vestment if such property is exchanged solely for property of like kind. This provision en- ables taxpayers to defer capital gains tax that would otherwise be triggered upon the sale of ap- preciated real estate. Deferred exchanges allow a taxpayer to sell a relinquished property and acquire replacement property later, provided specific timing and procedural requirements are met. Listed below are sev- eral key requirements that must be satisfied when entering a deferred exchange: • Like-Kind Property re - fers to the nature and char- acter of the property, not its grade or quality. Both relinquished and replace - ment properties must be of like kind; for real estate, this is broadly interpreted (e.g., an apartment building may be exchanged for raw farmland or a commercial of- fice building exchanged for a retail strip mall). Important exclusions to this apply to personal residences, prop- erty held primarily for resale (inventory), and foreign real estate, although foreign for
Sicklerville, NJ Dollar General
SICKLERVILLE,NJ — Cushman & Wakefield has arranged the sale of a subur- ban retail asset in Sicklerville. Located at 1601 Williamstown Erial Rd., the 11,528 s/f build - ing sold to VanRock Proper- ties for $1.675 million. The property is 100% leased to Dollar General through 2029. Cushman & Wakefield’s An- drew Schwartz, Jordan So- bel, Andre Balthazard, Dan Bottiglieri and Andy Merin marketed the property on be- half of the seller, Erial-Jarvis
LLC , and procured the buyer. “The deal generated signifi - cant market interest, with an offer being accepted within two weeks of marketing launch, which speaks to the demand for stabilized retail assets in the suburban New Jersey market,” said Sobel. “The buyer is a 1031 exchange purchaser, highlight- ing the property’s appeal to investors seeking tax-deferred investment opportunities. We are pleased to have delivered an expedited, successful result for our client.” MAREJ s/f shopping center at 433 NC Hgwy. 49 South in Asheboro, NC • College Lakes, a 43,041 s/f shopping center at 929 McAr - thur Rd. in Fayetteville, NC • Kris Krossing, a 49,800 s/f shopping center at 3320 4th Ave. in Conway, SC All three centers are anchored by Food Lion, a leading super- market brand serving the South- eastern and Mid-Atlantic US. “This full-cycle event exem - plifies the strength of Capital Square’s investment strategy and the enduring appeal of 1031 exchange and DST pro - grams,” said Whitson Huff- man , co-chief executive officer and chief investment officer of Capital Square. MAREJ
Capital Square closes grocery DST sale RICHMOND, VA — Capital Square announced the suc- cessful sale of CSRA Grocery Portfolio I, DST. The fund included a portfolio of three grocery-anchored shopping centers in North Carolina and South Carolina. Investors in the Capital Square-sponsored Dela - ware statutory trust realized a 184% total return from their 1031 exchange investment.* Since 2018, Capital Square has completed 34 full-cycle DST programs, producing an aver- age total return of 166.79% and an average internal rate of re- turn of 12.14% for investors.** CSRA Grocery Portfolio I included the following assets: • West Point Village, a 48,246
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