The IRS 1031 has many benefits and most investors are aware of the major ones, yet there are some lesser known benefits that can offer investors a good advantage. The reverse 1031 real estate exchange is one such benefit and is a fairly new development. It allows investors to purchase the replacement property prior to selling the old property. A Qualified Intermediary must hold one of the titles, as the investor is not allowed to hold both at the same time, and this does tend to make it a more costly transaction. It is very useful in markets where properties sell quickly.
If an investor buys a replacement property of lesser value that the one being sold, then this is called a partial exchange and the investor must pay the relevant tax on the difference in property values. This type of 1031 properties exchange provides flexibility for investors who only want to reinvest part of their capital gains into new, “like kind” property.
Other properties that may qualify under the IRS 1031 include properties owned in the United States, such as a TIC (tenant-in-common) investment property where a large group of investors each own a part of a commercial building. Water and mineral rights along with oil and gas investments may also qualify under the 1031 like kind property exchange.
There are also times when foreign exchanges are considered to be “like kind” properties, such as when the investor exchanges a foreign property for another foreign property. For instance, exchanging a French property for a Canadian property would be allowable, whereas exchanging a U.S. property for a Canadian property would not.
Another way to qualify for the IRS 1031 code is through improvement exchanges, also known as build-to-suit or construction exchanges. This enables investors to buy a replacement property of lesser value than the one they are selling. A Qualified Intermediary holds the title to the replacement property and the investor then has 180 days to improve the value of the property to achieve the value required for full tax deferral.
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