1031 Exchange Rules in Massachusetts

A like-kind exchange is a tax-deferred transaction that allows for the disposal of an asset and the acquisition of another similar asset without generating a capital gains tax liability from the sale of the first asset.

Property types that are considered to be “Like-Kind” properties and are eligible for 1031 Exchange in Massachusetts are:

Any Massachusetts real estate held for productive use in a trade or business or for investment purposes is considered like-kind. It should be noted, a primary residence does not fall into this category, however, vacation homes or rental properties may qualify if they meet qualifying criteria.

Land, land improvements resulting from human effort including buildings and machinery sited on land and various property rights over the preceding (ex. homes, apartment buildings, shopping centers, commercial buildings, factories, condominiums, leases of 30-years or more, quarries and oil fields.) All types of real property are considered like-kind and thus exchangeable for all other types of real property in a 1031 exchange.

Owners of investment and business property may qualify for a Section 1031 deferral. Individuals, C corporations, S corporations, partnerships (general or limited), limited liability companies, trusts and any other taxpaying entity may set up an exchange of business or investment properties for business or investment properties under Section 1031.

SIMULTAMEOUS SWAP
To accomplish a Section 1031 exchange, there must be an exchange of properties. The simplest type of Section 1031 exchange is a simultaneous swap of one property for another. In order to successfully execute a Section 1031 exchange, there must be an exchange of properties. The most fundamental form of a Section 1031 exchange is a simultaneous swap of one property for another.

DEFERRED EXCHANGES
Deferred exchanges are more complex but allow flexibility. They allow you to dispose of property and subsequently acquire one or more other like-kind replacement properties.

To qualify as a Section 1031 exchange, a deferred exchange must be distinguished from the case of a taxpayer simply selling one property and using the proceeds to purchase another property (which is a taxable transaction). Rather, in a deferred exchange, the disposition of the relinquished property and acquisition of the replacement property must be mutually dependent parts of an integrated transaction constituting an exchange of property. Taxpayers engaging in deferred exchanges generally use exchange facilitators under exchange agreements pursuant to rules provided in the Income Tax Regulations.

REVERSE EXCHANGE
A reverse exchange is somewhat more complex than a deferred exchange. It involves the acquisition of replacement property through an exchange accommodation titleholder, with whom it is parked for no more than 180 days. During this parking period the taxpayer disposes of its relinquished property to close the exchange.

A Section 1031 tax-deferred exchange, as stipulated by the Internal Revenue Code, enables property owners to postpone the recognition of capital gains taxes that would otherwise be incurred upon the sale of business or investment properties. This deferment can extend indefinitely until the investor opts for a “cash-out”, or conducts a taxable transaction by acquiring non-like-kind assets such as cash or other ineligible properties.

Typically, capital gains taxes are only applicable in the state where the final property transaction occurs. Nevertheless, certain states adopt distinctive stances which may subject taxpayers to potential double taxation. Currently, states including California, Montana, Oregon, and Massachusetts enforce these clawback measures. Contact Corcapa 1031 Advisors to learn more about the clawback provisions in Massachusetts.

1. CONSULT
Speak with your financial and tax advisors before selling your property to make sure a 1031 exchange is right for you.

2. FIND A QUALIFIED INTERMEDIARY (QI)
Choose a QI before you close escrow. They will hold your exchange proceeds during the transaction process. Do not take receipt of funds – all proceeds must go to the QI or 1031 is invalidated.

3. CHOOSE REPLACEMENT PROPERTY
You have 45 days to “identify” replacement property, and 180 days to close on the relinquished property.

Corcapa 1031 Advisors specializes in locating like-kind replacement properties at equal or greater value for full tax-deferral.

4. DEBT OR NO DEBT?
The IRS requires matching the debt from your relinquished property with equal or greater debt in the replacement property.

Don’t need debt? You can buy properties with debt or without.

Debt always brings some risk to real estate ownership, but can provide the benefit of increasing depreciable basis and sheltering some cash flow from taxation.

5. PROCESSING & PAYMENT
After you select your replacement property, Corcapa 1031 Advisors prepares your purchase documents and sends them to you for signature. Next, sign paperwork with your QI releasing your sale proceeds to the escrow account.

6. RECEIVE DISTRIBUTION
After you’ve closed on the replacement property, cash flow distributions are typically made monthly and deposited directly into your bank account.

In a like-kind exchange, it is not mandatory for the swap of properties to occur simultaneously. However, it is imperative to adhere to two specific timing restrictions. Failure to meet these deadlines will result in the entire gain being subject to taxation. These time limits are strict and cannot be extended under any circumstances or hardships, with the sole exception of those occurring during presidentially declared disasters.

The first limit is that you have 45 days from the date you sell the relinquished property to identify potential replacement properties. The identification must be in writing, signed by you and delivered to a person involved in the exchange like the seller of the replacement property or the qualified intermediary. However, notice to your attorney, real estate agent, accountant or similar persons acting as your agent is not sufficient.

It is imperative that replacement properties are meticulously detailed in the written identification. For real estate, this specification should include a legal description, street address, or a distinct name. Adherence to IRS regulations regarding the maximum number and value of properties allowable for identification is essential.

The second limit is that the replacement property must be received and the exchange completed no later than 180 days after the sale of the exchanged property or the due date (with extensions) of the income tax return for the tax year in which the relinquished property was sold, whichever is earlier. The replacement property received must be substantially the same as property identified within the 45-day limit described above.

A 1031 Exchange is a transaction in which a taxpayer is allowed to exchange one investment property for another by deferring the tax consequence of a sale. The transaction is authorized by 1031 of the IRS Code.

Contact a Corcapa 1031 Advisor for more information 1031 Exchange process and if it is right for you.