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Sellers of commercial-use real property should always consider doing an Internal Revenue Code section 1031 tax-deferred exchange in connection with the sale of their property (unless the seller is “cashing out”). In a 1031 exchange, certain protocols are utilized to allow the sellers of commercial-use real property to avoid—temporarily and possibly permanently—paying capital gains tax on sale of the commercial property (called the “relinquished property” in a 1031 transaction), which is generally in the 20% range.
Technically, the capital gains tax is not wiped out, but instead, delayed. However, they can be delayed indefinitely as long as the 1031 seller keeps the purchased property (“called the replacement property” in a 1031 transaction) or repeats the 1031 exchange protocols each time he/she sells. Also, if the 1031 participant owns the replacement property at the time of his/her death (no matter how many 1031 exchanges took place), the participant’s heirs receive the stepped-up (then-current) tax basis and no capital gains tax is due if the property is immediately sold.
There are many procedural requirements tied to a proper Internal Revenue Code section 1031 tax-deferred exchange but, as explained above, the upside can be quite profitable and the requirements are not particularly burdensome, which makes the 1031 exchange a money-saving tool that all commercial property sellers should at least consider.
The attorneys at Lieser Skaff Alexander have successfully handled numerous 1031 transactions worth millions of dollars and can be trusted to handle and protect your hard-earned dollars.