Owners of business property for sale have to pay taxes on their profits. After the generous depreciation allowance, this amount can be high and limit funds available for reinvestment. A 1031 tax deferred exchange allows sellers to postpone paying the taxes due if certain conditions are met. Although the rules for the exchange are easy to work with, the time frames for compliance are set in stone. If these time frames are missed, the IRS disallows the exchange and demands the thousands or hundreds of thousands of dollars in taxes. Sellers can protect themselves by working with a commercial real estate agent who specializes in this process.
Rules of a 1031 Tax Deferred Exchange
Investors must replace the property with like property of equal or greater value. This does not mean that an office building can only be replaced with another office building; it means that investment property must be replaced with investment property. If undeveloped industrial land is sold, a medical building can be purchased. Business property selling for $475,000 must be replaced with real estate worth $475,000 or more.
From the day of closing, the seller has 45 days to identify replacement property and 180 days to purchase it. This time frame is much more generous than it sounds as real estate transactions take months. Experienced agents help their sellers find replacement property as soon as an offer is received and accepted. With this process, property owners have adequate time to locate, inspect and purchase new property without stress.
The 1031 tax-deferred exchange allows serious investors to capitalize on real estate transactions. As the tax from the sale is deferred to a future time, sellers decide when to pay the IRS. This allows more money for investments as these owners of the business property for sale use all of the funds received.