Update on 1031 Exchanges

If you are considering any transactions utilizing Section 1031 of the Internal Revenue Code for a tax-deferred exchange, you would be well-advised to close these transactions before December 31, 2014. The Federal Budget issued for 2015 by the U.S. Treasury Department contains a proposal to limit the amount of deferred capital gains under Section 1031 to $1,000,000, indexed for inflation, effective January 1, 2015. While this proposal has not yet become law, momentum appears to be gathering in the direction of this or some other constraint on the use of 1031 exchanges.

1031 exchanges have been used by investors for decades. They can make otherwise marginal transactions much more attractive by deferring the capital gain that would otherwise have been incurred on the sale of the property. In general, a Seller has up to 45 days from a sale of property within which to identify as many as three properties as potential exchange properties. The closing or closings with respect to the acquisition of the exchange properties must occur within 180 days of the sale of the property. Typically, the funds from the sale are held by a disinterested party, called a “qualified intermediary” and are then used to acquire the exchange properties.