1031 Exchange: Tax Deferral in Commercial Real Estate Transactions

John Daskam

Share Post:

For commercial real estate owners, selling assets which have been fully depreciated, fully stabilized, or held long term, can be an attractive option given certain market conditions, or over-saturation of the given asset type within an investor’s portfolio.

Regardless of the reason, a 1031 exchange may be a good option to consider for the sale proceeds which may allow the investor to defer tax on the gain. A prospective seller may wish to continue to invest the proceeds from the sale, and may do so, while deferring the tax consequences, through a like-kind exchange, taking advantage of Section 1031 of the Internal Revenue Code.

By exchanging the proceeds from the sale, an investor may swap the investment property for another, and defer the capital gains tax that otherwise would have to be paid as a result of the sale.

There are a number of rules governing a transaction where 1031 exchange proceeds are being used to purchase a property or where the buyer is using such proceeds to fund a future acquisition. These rules relate to, among other things, the time during which an investor must identify the replacement property, how the sale proceeds must be held (i.e. through a qualified intermediary), the buyer’s corporate form before and after the sale occurs, and the types of property that qualify for an exchange.

The 1031 exchange can provide significant value to real estate investors and should be considered in any commercial real estate transaction. For questions about how to take advantage of this mechanism, reach out to the real estate team at M&D.

ABOUT THE AUTHOR

John Daskam

John Daskam joined Milgrom & Daskam as a Partner in January 2019. He counsels clients on general corporate & transactional, commercial finance, and commercial real estate matters. John strives to balance the practice of law with significant involvement in local community organizations and an active outdoor personal life. He sits on the board of directors of Burning Through Pages, a local non-profit fostering a community of avid readers and inspired thinkers by providing literature, resources, and time to youth organizations. He is also on the board of directors of Sharing Connexion, an organization devoted to sharing its real estate expertise with nonprofits to empower their ability and capacity to serve their missions.

More Articles