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The Fast Facts Self Storage Owners Need to Know About the 1031 Exchange

The Fast Facts Self Storage Owners Need to Know About the 1031 Exchange
Posted: 2/21/2017 Link: LiveOakBank.com
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Did you know that when you are ready to sell your self storage facility, there are tax advantages that can defer income taxes using the 1031 exchange? Internal Revenue Code section 1031 allows an investor to sell a property, reinvest the proceeds into a new property and defer the income tax from the sale.

What is a 1031 Exchange? Investment, rental, vacant land or realty used in a trade or business can be sold and its proceeds applied toward the purchase of a similar or like property within 180 days of sale, all without incurring any income tax consequences.

It is important to note that the purchased property must be of an equal or higher value, there must not be any cash received and there can be no debt relief to avoid the income tax.

According to an article in Inside Self-Storage, “exchanges involving any type of real property assets, whether land, apartments, office buildings, shopping centers or storage facilities, are permitted if they are held for investment and are not inventory.”

This provides leverage for a self storage owner to move his or her business to a larger facility as the business grows, without being hindered by income tax.

Fast Facts:

A seller must use an intermediary to handle the buying and selling transactions. A reputable and knowledgeable intermediary is highly recommended as the seller does not touch any money.

A 1031 exchange is only applicable for investment or business property, not personal use property therfore you cannot swap one primary residence for another.

The property owner has 45 calendar days, post‐closing of the relinquished property, to identify in writing and deliver to the seller/intermediary up to three potential replacement properties of like‐kind.

To qualify for a 1031 exchange, the intermediary on the seller’s behalf must also purchase all replacement properties within 180 calendar days following the closing sale of the relinquished 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.

Remember it is always wise to consult a qualified tax professional to guide you through the complex rules and requirements.

The Four Types of 1031 Exchanges:

  1. Simultaneous: This allows investors to relinquish and close on a replacement property in the same day.
  2. Delayed: This is the most common and allows investors to sell their investment property first and find a replacement property within a certain amount of time.
  3. Reverse: You buy first, you pay later. What makes this difficult is that this type of exchange must be an all cash purchase and most banks will not lend to you in these circumstances.
  4. Construction/Improvement: There are a lot of investors that sell a property and realize the one they want to buy costs less than the one relinquished. This type of exchange allows you to use the remaining funds to build or improve on the property you want to buy.

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