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1031 Exchange

A 1031 exchange, also known as a like-kind exchange or a tax-deferred exchange, is a tax strategy used by real estate investors in the United States to defer capital gains taxes when selling one investment property and acquiring another similar property. The name "1031 exchange" comes from section 1031 of the Internal Revenue Code, which outlines the rules and requirements for such exchanges. In a typical real estate transaction, when an investor sells a property for a profit, they are required to pay capital gains taxes on the profit made from the sale. However, with a 1031 exchange, the investor can defer paying these capital gains taxes by reinvesting the proceeds from the sale into another "like-kind" property.

Types of 1031 Exchange Structures in Texas

  1. Like-Kind Property: The property being sold and the property being acquired must be of "like-kind," which means they are of the same nature or character, even if they differ in grade or quality. For example, a rental property can be exchanged for another rental property, or vacant land can be exchanged for a commercial building.

  2. Qualified Use: Both the relinquished property (the property being sold) and the replacement property (the property being acquired) must be held for business or investment purposes, not for personal use. Primary residences, second homes, and property held primarily for sale do not qualify.

  3. Timing: The exchange must be completed within strict time limits. The taxpayer has 45 calendar days from the sale of the relinquished property to identify potential replacement properties, and 180 calendar days from the sale of the relinquished property to acquire the replacement property. These deadlines are strict and cannot be extended.

  4. Qualified Intermediary (QI): The taxpayer must use a qualified intermediary (QI) to facilitate the exchange. The QI is a neutral third party that holds the proceeds from the sale of the relinquished property and uses them to acquire the replacement property on behalf of the taxpayer. The taxpayer cannot take actual or constructive receipt of the proceeds at any time during the exchange process.

  5. Equal or Greater Value: The value of the replacement property must be equal to or greater than the value of the relinquished property. If the replacement property is of lesser value, the taxpayer will be taxed on the difference, known as "boot," which may trigger capital gains tax.

  6. Proper Documentation: The exchange must be properly documented, including written agreements with the QI, identification of potential replacement properties within 45 days, and acquisition of the replacement property within 180 days.

  7. Limited Exchanges: The taxpayer cannot use the proceeds from the sale of the relinquished property to acquire other types of property, such as cash or non-like-kind property, without incurring taxable gain.

What is the Timeline?

Lay the Groundwork

Speak with your real estate, financial and tax advisors to understand the timelines and restrictions and enlist a qualified intermediary to facilitate the transaction.

Sell Your Property

The specialists at Partners have access to the largest pool of qualified buyers in the industry, helping you sell your property quickly and at a good price.

Identify a Replacement

You have a limited time to make your next transaction, purchasing up to three replacement properties. Partners has the largest inventory of exclusive listings, giving you a range of excellent up leg options.

Purchase a Property

As the market leader in 1031 exchanges and in overall transactions, Partners has the experience and expertise to guide you through the closing process successfully and painlessly.

Report Your Exchange

Your tax advisor must report the exchange on your tax return for the year in which you sold your down leg property.

Down leg sales commences

45 day period to identify replacement property or properties

Exchanger must close on replacement investment property or properties within 180 days of the closing date of the property that was sold

Is an Exchange Right for You?

While every property type varies in terms of return, management responsibilities, and market values, the overall market for property values generally moves with a high level of correlation. When considering doing a 1031 exchange from your current property to a net lease investment property the current market value of your asset is not the most important factor to consider. This is because all asset values rise and fall parallel to one another based on the current macroeconomic environment. To put it simply, you can perform a 1031 exchange at any point in your investment path without the risk of losing money. This again is due to the entire market closely mirroring each other. As shown below, switching from an industrial property to a retail property for example will see the same periods of appreciation and depreciation in value. Why not invest in something that provides solidified and steady returns no matter what the market decides to do?


Commercial Property Price Index


Cumulative Change in CPPI

Historical Stability

As shown below, both rent and occupancy for single tenant retail properties has stayed stable regardless of macroeconomic influences. STNL properties are structured so that the investment is less management-intensive, provides a more stable income, and has fewer direct costs to the property owner. NNN investments are “Passive” investments and investors receive their distributions “Mailbox Money” without the usual hassles of residential rentals. Most STNL agreements typically have lasting contracts that provide for the tenant’s use over an extended period of time. The rent terms are a minimum of 5 years but the average is 10 to 15 years with some rent agreements lasting for 25 to 50 years. These leases are almost always backed by a secure corperate entity which makes the commitment unwavering.
In our experience, most of these properties continue to produce cash flow long after the owner is gone; hence why we call them “last mile properties”.


Historical STNL Occupancy Rate


U.S. Net-Lease Investment by Investor Type

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