A 1031 exchange is a tax-deferral tool for commercial real estate owners. Section 1031 of the Internal Revenue Code provides the basis for a 1031 exchange. With a 1031 exchange, an owner can defer capital gains taxes by reinvesting the proceeds from the sale of a property in a like-kind property. Key rules for 1031 exchanges include the following:

  • Property must be considered "like-kind." Real properties generally are of like-kind, regardless of whether the properties are improved or unimproved. However, real property in the United States and real property outside the United States are not like-kind properties.*
  • The real estate owner is forbidden from taking funds from the closing. Profit from the property sale must be transferred to a certified exchange agent, who then transfers the funds to the settlement for the replacement property.
  • Within 45 days of selling the original property, the real estate owner must identify in writing the replacement property they plan to purchase for the 1031 exchange.

* Source: https://www.irs.gov/businesses/small-businesses-self-employed/like-kind-exchanges-real- estate-tax-tips

One disadvantages to a 1031 exchange is that it reduces the basis for depreciation on the replacement property.
The second disadvantage is the capital gains are simply deferred until the time that you sell the commercial property.  You will pay taxes on the property, but not until you sell it without exchanging it for another property.  A like kind exchange is a great tool for moving your business into a larger property with less tax expenses.  For that reason Nathan Walldorf and thousands of other Realtors around the country lobbied this year to be sure that our senators and congressmen knew how important the 1031 exchange is to commercial real estate.  We won a great battle in 2018 to preserve the like kind exchange.
Feel free to contact Nathan Walldorf about any questions that you may have about a like kind exchange in Chattanooga, TN.  Nathan would also be happy to help you with a commercial purchase or sale of a property.  Call Nathan at 423-544-7700