Section 1031 is a provision of the Internal Revenue Code that permits a taxpayer to exchange business-use or investment real property for other like-kind business or investment assets while deferring taxable gain on the sale of the old assets. The law has been in effect since 1921.

The term ‘like-kind’ property in a 1031 exchange has a looser definition than people typically think. ‘Like-kind’ property may be any real property for business-use or investment purpose that may be bought from the sale of a property of similar nature or character, even if they differ in grade or quality. The value of the properties have no significance in determining whether they are ‘like-kind’ but solely on whether they are for business or investment purposes.

A 1031 exchange can be a little more complicated than a typical transaction, but here at Granite Exchange Services, we make it as simple as possible for you by providing detailed instructions. As your qualified intermediary (QI), we will make every process transparent and guide you through the entire process.

Individuals of any amount of wealth and business enterprises of any type and from any industry as long as they are tax paying entities can use a 1031 exchange.

Using a 1031 like-kind exchange allows the owner of a business-use or investment property to have more capital from the sale of the said property for reinvestment on a like-kind property by getting the capital gains tax deferred. In other words, the owner can maximize the proceeds of a property sale for reinvestment on another property by accessing the amount which would otherwise be deducted as a capital gains tax in a normal transaction.

In a 1031 exchange, the third-party intermediary, or qualified intermediary (QI), fulfills documentation requirements and oversees that the sale proceeds are held until the exchange is complete and fully meets the guidelines required by the IRS. A qualified intermediary helps the property owner understand how a 1031 exchange works and interacts with the title company or closing attorney so that the closing statement reflects a 1031 exchange.

Though a qualified intermediary handles the majority of functions and requirements involved in a 1031 exchange, it is not the closing agent. The closing agent should be selected by the property owner just as in any other transaction.

A forward exchange is the most common type of 1031 exchange where the old or relinquished property is sold and closed before the replacement or purchase of a new property. After selling a property, the seller has 45 days to identify what asset (replacement property) will be bought with the proceeds of the sale. After the completion of the 45 days, an additional 135 days is given to close escrow on the replacement property. The entire transaction cannot exceed 180 days from the close of escrow on the sold or relinquished property.

In a reverse 1031 exchange, a property owner acquires an asset (replacement property) first, after which a period of 45 days is given to choose what asset (relinquished property) will be sold. An additional 135 days is given to complete the sale of the relinquished property. Upon the close of escrow, the property owner can pay themself back for the acquisition, or pay off the loan used to acquire the replacement property prior to the selling of the relinquished property.

A build to suite or improvement exchange 1031 exchange can be used when a property owner wishes to make improvements to the replacement property utilizing the proceeds of the sale of the relinquished property. An improvement exchange requires the owner to ‘park’ a title to either the relinquished or replacement property with an Exchange Accommodation Title Holder (E.A.T.). The improvements must be identified within the 45-day identification period and title of the improved property must be passed to the owner within the 180-day exchange period.

When setting up for a 1031 exchange, it is critical for the property owner to make sure that their qualified intermediary is a professional company trustworthy and capable of providing quality service and security for exchange funds. With the amount of money involved and the complexity of the process involved, it is advantageous to work with a full-service 1031 exchange that can be relied on.

No, the deferred capital gains tax from 1031 exchange does not permanently go away. However, the exchange enables the property owner to utilize an effective tax planning strategy that facilitates the growth of wealth first.

Yes, as long as you treat them as you would any other unrelated tenant, they must pay fair market rent.



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