Section 1031 Insurance Policy

1031 Insurance PolicyEntering into a Section 1031 Exchange should be done with careful consideration of your overall goals and objectives. The successful completion of an exchange requires that the old or Relinquished Property be replaced with new or Replacement Property of equal or greater value. Selecting the new property takes a certain amount of due diligence. If the goal is to receive only cash from the sale of commercial/investment property, then an exchange is not the solution. If however, you want to acquire other real property and relocate your commercial/investment property then an exchange will provide full deferral of capital gains tax, deferral of previously taken deprecation and, in all but one state, deferral of state capital gains tax.

In situations where you may not be certain that quality property is available, it is still advisable to conduct an exchange and use the first 45 days to take a serious look at replacement property options. This will preserve your right to complete an exchange, a right that is only available if you enter into an Exchange Agreement with a Qualified Intermediary (QI) before you close on the Relinquished Property. Think of this strategy as “1031 insurance.” If you are unable to identify Replacement Property that meets your needs within 45 days, the funds held by the QI will be released to you, usually less a fee, but without any penalty or additional tax exposure from the delay in meeting your tax obligations.

If you are successful in identifying possible Replacement Property choices, then you will have the remaining time, an additional 135 days, to complete your due diligence, make the final selection from the possible choices and close on the new property.


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