1031 Exchanges

If you are investing your Self directed IRA, you will not need to do a 1031 Exchange when you get ready to sell the property.  The purpose of a 1031 Exchange is to defer any capital gains taxes on the sale of investment real estate.  Since a self directed IRA is not subject to capital gains tax, a 1031 exchange would not apply.

Because the property was originally purchased through the IRA, and any gain would be paid to the IRA, any tax owed would not be owed until distributions are made from the IRA, generally after retirement.  If the purchase was made through a Roth IRA, there are no taxes owed at all.

However, if you are investing other than IRA funds, a 1031 Exchange is an excellent way to sell property.  Based on Section 1031 of the Revenue Code, a 1031 Exchange allows an investment property owner to sell one property and purchase another and defer any capital gains tax owed.  There are a few  basic rules that must be followed:

1. Both the property sold and the property purchased must be like-kind.  Investment property for investment property or business property for business property.  However, those definitions are very broad.  Typically they are interpreted as real estate for real estate.
   
2. The Seller/Buyer cannot receive funds from the transaction.  A Certified Exchange Intermediary will actually handle the funds and insure the exchange is done correctly.
   
3. There are strict time limits.  Up to 6 replacement properties must be identified within 45 days of the closing of the sold property.  And at least one of those properties must be closed within 180 days of the closing of the sold property.

There are more rules which must be followed which are beyond the scope of this discussion.  If you are interested in finding out more about 1031 Exchanges, please contact us and we’ll be glad to discuss it with you.