1031 Exchange Florida Attorney

1031 exchange attorney florida

Fort Myers 1031 Exchange Attorney

At The McIntyre Law Firm, our Florida real estate attorneys provide guidance on a wide range of real estate matters, including how to arrange a like-kind exchange of real estate. These transactions, also known as 1031 exchanges, are often sought for the tax advantages they offer. However, they must be carried out extremely carefully in order to take advantage of those benefits under IRS regulations. The McIntyre Law Firm is no stranger to counseling clients on the benefits of 1031 exchanges while also cautioning them regarding the risks of these real estate transactions. Contact our Florida attorneys to learn more about the conditions and unique requirements of these transactions.

What is a 1031 Exchange?

A 1031 exchange is named after Section 1031 of the United States Internal Revenue Code. It allows you to avoid paying capital gains taxes by selling an investment property and reinvesting the profits within a specific time frame in a property of similar kind and value. In short, a 1031 exchange is the exchange of one property for another without incurring a capital gains tax penalty. It basically says that so long as an investor continues to put money into more property, his or her taxes will be deferred. (It’s important to note that a 1031 exchange is a deferral of taxes rather than a credit or decrease. So while taxes are not required to be paid at the time of sale, they must still be paid later.) When dealing with these exchanges, it’s important to know what constitutes a “like-kind” property. Thus, your replacement property should be of equal or greater value to obtain the full advantage of a 1031 exchange. This allows for many different types of real estate deals to be exchanged. Vacant land, for example, might be swapped for a commercial structure, or industrial property for residential. A single-family home can be converted into a duplex, raw land into a shopping mall, or an office into apartments.  The exchanger has the ability to modify investment methods to meet their specific requirements. However, you can’t swap real estate for something like stocks or artwork because it isn’t considered like-kind.
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Advantages of a 1031 Exchange

Some real estate investors and property owners are afraid to sell because they may incur hefty capital gains taxes if they do. Also, as an investor’s demands evolve and change, the sort of investment property they desire changes as well.

Relocation, estate planning, retirement, the desire to enhance the flow of income, and the need to minimize management obligations are all factors that may influence the sort of property investors choose. A 1031 exchange offers real estate investors the option of maximizing their assets into more desired investment properties.

There are a number of reasons why an investor might choose to utilize a 1031 exchange. The most obvious advantage is the tax deferral. A 1031 exchange permits you to defer capital gains tax, which then allows you to put more money into the replacement property.

Other benefits of a 1031 exchange may include:

  • Diversifying assets.
  • Obtaining a property that has better return prospects.
  • Resetting the depreciation clock on a property.
  • Consolidating several properties into one.
  • Dividing a single property into several assets.
  • Investing in an already managed property rather than managing one.

Disadvantages of a 1031 Exchange

Though you may avoid capital gains taxes with a 1031 exchange, you may still incur income taxes. For example, if you’ve owned the property for a long period of time, you may have taken depreciation deductions that have lowered the property’s net adjusted basis. (This is the initial purchase price plus capital improvements and minus the cost of depreciation.)

The depreciation may be recaptured if you sell it for more than the net adjusted basis, which implies the gain above the net adjusted basis can be taxed as income.

Further, any money remaining from the sale of the first property after the acquisition of the second, referred to as “boot,” can be taxable as income as well. This is why it is crucial that your exchange occurs between a property of equal or greater value than your own. For example, if your previous mortgage was $700,000 and your new mortgage is $550,000, the lower debt liability qualifies as boot. This means you’ll still owe taxes on the $150,000 difference for that property.

1031 Tax-Deferred Exchange: How Does it Work?

Any funds obtained through the sale of a property are still taxed under section 1031. As a result, rather than straight to the seller of the property, the profits of the sale must be transferred to a qualified intermediary.

A qualified intermediary is a person or corporation who agrees to help with a 1031 exchange by keeping the money until it may be delivered to the seller of the replacement property. As such, the intermediary will eventually transfer those profits to the seller of the replacement property or properties themselves. There can be no formal relationship between the qualified intermediary and the parties exchanging property other than the transaction in question.

Within 45 days, you must find a substitute property for the assets sold, and the exchange itself must be completed within 180 days.

1031 Exchange Residential to Commercial

Although most people think of 1031 exchanges in terms of swapping two Florida commercial real estate buildings, this isn’t necessarily the case. A residential property can be used to accomplish a 1031 like-kind exchange.

The assets in question must, however, fulfill two tests: (1) they must be kept for investment, and (2) they must be of “like-kind.” As a result, an investor’s home or primary residence cannot be used to execute a 1031 exchange. Investors who switch from other residential properties to commercial real estate might profit from scalability, higher-quality tenants, long-term leases, and fractional ownership of institutional-grade properties.

1031 Exchange Commercial to Residential

Both the relinquished and replacement properties must be “held for investment,” according to 1031 exchange regulations. Like we mentioned before, a primary house or vacation property does not fulfill this criterion and, in most circumstances, cannot be utilized in a 1031 exchange. This applies to other forms of personal property as well.

However, that is not to say that commercial property can be swapped for Florida residential real estate, only that it cannot involve a primary place of residence.

Why Do I Need an Attorney for a 1031 Exchange?

While there are many benefits to a 1031 tax-deferred exchange, there are also a number of restrictions for how such a transaction can be successfully completed. As a result, there are several things that must be carefully considered when it comes to these exchanges, and challenges will likely be encountered.

That is why it can be extremely beneficial to hire a real estate attorney for assistance. Your attorney can advise you on the 1031 exchange process as well as help you determine whether or not this exchange is something that is a good option for you personally.
Some of the other things your attorney can help you with include:

  • How to limit exposure to capital gains taxes.
  • Establishing who is eligible to hold the money from the sale of the first property (a qualified intermediary).
  • Locating a second property to complete the transaction.
  • Limits on the amount of time that can be used to complete transactions.
  • How to utilize a 1031 exchange to settle an estate.
  • Completing and filing all of the documentation that goes into a 1031 exchange.
  • IRS requirements that the transaction be reported on the individual’s tax return.

Contact Our Experienced Fort Myers Real Estate Attorneys Today!

It takes a lot more than just document preparation to complete a successful 1031 exchange in Florida. There are a number of unique needs that investors often face when dealing with something of this nature. Luckily, at The McIntyre Law Firm, we have successfully represented many of our clients in 1031 exchanges ranging in size and complexity.

If you’re seeking to exchange like-kind property in Florida, speak with our skilled real estate lawyers to ensure that your rights remain protected and that you’re well-informed before buying a business in Florida or selling a business in Florida. Call our office at 239-275-2213 or fill out our online intake form to book a free consultation.