1031 exchanges: Key benefits to Commercial Real Estate Investors

1031 exchanges: Key benefits to commercial real estate investors.  

A 1031 exchange is a tax-deferral strategy that allows real estate investors to sell an investment property and reinvest the proceeds into a "like-kind" property while deferring federal capital gains taxes. The 1031 Exchange is named after Section 1031 of the Internal Revenue Code.

A tax-deferred exchange allows a property owner the opportunity to build wealth by deferring taxes. Under the 1031 exchange an investor can reinvest the proceeds from the sale of a property. Under a normal sales scenario the proceeds would otherwise be paid to the government in the form of taxes. The 1031 tax deferment allows for the full use of your equity from the sale, thus increasing your purchasing power and allowing an investor to acquire a more valuable replacement property, often financed through a commercial real estate loan.

There are three main 1031 exchange rules.  First, the investor needs to establish that the property will be sold through a 1031 exchange.  This is typically done with the assistance of a professional intermediary who is familiar with and manages the 1031 exchange process. Second, the property being sold and the property being purchased must be "like-kind," typically income producing investment properties and not a personal residence.  Finally, the replacement property must be of equal or greater value than the property being sold.

The exchange must occur within a strict timeline. An investor needs to identify a replacement property within 45 days of the sale of the relinquished property. In addition, the purchase of the replacement property must occur by within 180 days from the date of closing on the sale of the first property. Proceeds from the sale are usually held in escrow with a professional intermediary who manages the entire process, from the sale of the relinquished property to the purchase of the replacement property.

Real estate investors utilize 1031 exchanges as a powerful strategy to grow their portfolios and defer taxes, allowing them to leverage the full sale proceeds into new higher quality and more valuable investment.

Authors

Francis McCauley

VP / Commercial Loan Officer

Francis is a seasoned commercial loan officer who has worked at Kearny Bank since 2015.  Francis focuses on originating commercial real estate mortgages for the bank with property types comprised of multifamily, mixed use, retail, industrial and office buildings.  Francis concentrates on business opportunities located in our home state of New Jersey as well as New York, Connecticut, and Pennsylvania.  Francis has had a career in banking spanning over 25 years and has worked for national as well as local area banks and agency lenders.  Prior to his career in banking, Francis worked as a commercial real estate appraiser in New York.