Tulsa Commercial Real Estate Experts: What is the 1031 Exchange Program?

Tulsa Commercial Real Estate Experts: What is the 1031 Exchange Program?

by U.S. SBA Entrepreneur of the Year & Cofounder of Fears & Clark Tulsa Commercial Real Estate Group - Clay Clark

What is 1031 Exchange Program?

Those fun folks at the Internal Revenue Service have set up an Internal Revenue Code Section 1031 that has now become a very powerful tool that investors can use when deferring the capital gains taxes that they would normally owe immediately upon the completion of a commercial / investment transaction. The famous 1031 Tax Deferral allows a U.S. taxpayer (a human born in the United States) to actually reinvest the proceeds that they make from the sale of a property held for the purposes of investing or business purposes. The tax payer can then put the gained capital into another real estate or business investment while deferring the tax payments that would normally be due on the initial sale.

The most popular "move" that involves the 1031 exchange is the "Forward Delay Exchange." This "move" allows the taxpayer to sell a property and to defer the taxes normally due when investing in a property of equal or greater value within 180 days of first sales transaction. In order to pull this move off the investor must use a Qualified Intermediary's service. This is a safe harbor requirement put into place by the IRS to facilitate a valid tax deferred exchange.

Why does the IRS want to the taxes to be deferred if the revenue is invested immediately back into a property of equal or greater value?




It keeps the players in the game. Essentially, if you now ever want to fully cash out your chips, call it quits and walk away from the business world and into the world of retirement you are going to be paying a lot of taxes. With capital gains taxes expected to rise significantly in the coming years to offset huge amounts of government deficit spending, it might be a good idea to never cash out of the game completely. Simply buy commercial properties, improve their values, sell them and then roll the revenue into the purchase of yet another property.