A basic fact, that the large tax burden that often accompanies the sale of an investment property can be a troubling issue for many property owners. Thankfully, this burden can be removed through a Common Exchange of real estate, effectively trading one investment property for another. The 1031 Tax Deferred Exchange offers a great solution for those needing to defer the capital gains tax that arises with the sale of real estate. 1031 Exchangeoptions for tenants in Common is a national real estate investment consultancy recognized for investments structured for co-ownership.



In order to completely defer the payment of tax with the 1031 tenants in common exchange, among other things, the replacement property must be of equal or greater value, and all the equity from the sold investment property must be reinvested in the new investment property or properties. Completing a 1031 tenants in common exchange with a Tenants In Common interest ownership in a property, also known as co-ownership of real estate (CORE), allows investors not only to defer their capital gains taxes, but also an opportunity to trade up to larger, institutional-grade properties. 1031 tenants in common exchange is usually a three-way delayed exchange, referred to as a "Starker Exchange", in which an intermediary is used to facilitate the transaction. Section 1031 Exchange of the Internal Revenue Code lays out in detail the procedure and requirements for a tax-deferred exchange. It specifies that the properties must be held for investment or business purposes and that these properties being exchanged must be "like-kind," referring to the type of property being exchanged (real estate, personal property, etc.) and not its grade or quality. Qualifying property is broadly defined, for both the property being transferred and that received, as realty used for investment or business purposes. In effect, all investment real estate, whether it is an office building or a vacant lot, can be exchanged to any other piece of investment property. Consequently, investment realty (held for either appreciation or rental) can be exchanged for real property used in a trade or business and vice versa. Partial realty interests such as conservation easements and perpetual mineral or oil rights are exchangeable with other types of realty (including a land contract in which equitable title has been transferred), or a lease with at least 30 years remaining (including renewal options) can be exchanged for a fee-simple interest in realty. Note that personal residences are not eligible for 1031 tenants in common exchange. In addition, personal use realty is not eligible. The personal usage may be considered nominal or substantial pursuant to the 10% of days rented or 14-day test under Section 280A. When a mixed-use exchange involving realty with both qualifying and personal usages (such as an operating farm with a personal residence eligible for IRC section 121) exists, these different usages should be addressed through contractual allocations of the price.

There are three different ways of completing 1031 tenants in common exchange. These three options are:

Simultaneous Exchange: properties are transferred concurrently, having to close at the same time in order to avoid constructive receipt of the sale proceeds.

Delayed (or Starker) Exchange: the most commonly used method of performing a 1031 common exchange, this option allows the exchanger to close on the relinquished property before closing on the replacement property.

Reverse Exchange: only recently approved by the IRS for 1031 tenants in common exchange purposes, this exchange method allows the exchanger to purchase the replacement property before the relinquishing property is closed.