How does a 1031 Exchange work ?

5 Replies

I'm considering strategies for selling a property in Worcester, MA which has increased in value since I bought it at an estate sale four years ago with cash.

A suggestion from Brian J. Allen was to look at a 1031 exchange while evaluating the advantages/disadvantages of doing a lease option to buy with a potential buyer.  

I've heard of it but don't know much about 1031.  I'd appreciate any views and suggestions.  Thanks!

You’ll need an attorney (qualified intermediary) to work with. 

Take a look at the Exchange Authority; they are in MA and have reasonable fees. Good info on their website as well.

If your inclined to go with someone in Worcester- try Harry Kotseas’ office. They’re great to work with, overall. 

@Kate B. , It all starts with the use of an unrelated 3rd party called the qualified intermediary as @Erin Zamarro states, who documents the exchange on both sale and purchase, ensures proper security and transfer of funds and coaches you through the process.  There's several very specific steps and requirements but nothing that's too onerous as long as you have a QI willing to guide you through the maze.  

You can go to www.the1031investor.com to see how they work together to help you build your portfolio.  And there's a scenario calculator that can help you determine the benefit for you in doing a 1031 on a specific transaction.

You can look up 1031 exchanges on line and it will provide timelines. Essentially you sell your place, identify a more expensive property, and buy that within the timelines. this allows you to delay the CAP gains taxes and the depreciation recapture until you sell the next property. I agree with Erin that Harry Kotseas' office is a good law firm.

Everyone who posted is almost assuredly more of an expert, but just keep in mind that it's tax deferred not tax free! 

I did it with no regrets, but just understand what that means and how that might affect your "Master plan". 

Great info posted.  The objective is to focus on the dollars, not the properties.  You can sell one and by two; or sell three, and buy one.  What you are trying to achieve is re-positioning the assets to not only defer the capital gains (and depreciation recapture - yet only four years of depreciation in your situation), but hopefully increase cash flow or provide more upside by using every dollar in the sale.

Additionally, the opportunity for investment in 'like-kind' property is expansive.  Focus on the use of property, not type.  A multi-family can be exchanged for commercial, or medical for raw land, etc.  

Most importantly, you're asking the right questions, and knowing before you conduct a transaction.  Exchange Authority in Leominster does good work, and there are other QI's around locally and nationally that can provide the services also.