Commercial Real Estate Miami Understanding the 1031 Exchange

When it comes to buying or selling commercial real estate Miami properties, there are more than just doing research and closing the deal ? there is also the 1031 Exchange you should know about. In a nutshell, the 1031 Exchange are used by sellers in order to defer capital gains tax when buying a new property after selling one. Let''s explore further the details of this exchange.

Internal Revenue Code Section 1031

Also known as 1031 Exchange, this code section is a powerful way for commercial real estate Miami property owners and buyers to delay the onset of capital gains tax during transactions. The 1031 Tax Deferral allows everyone (buyers and sellers) to reinvest the money from the previously sold property held for business aims into another investment property. Because of this, capital gains taxes that would be otherwise required in the preliminary sale will be deferred.

There are several types of 1031 Exchange but many taxpayers use the Forward Delay Exchange. In this type of exchange, you sell the property and acquire a Replacement Property, which is equal or greater than the value of the previous one, within a period of 6 months.

Stages of the Exchange

Before starting the exchange process, it is imperative to consult with your advisor first in order to know if the 1031 Exchange is truly right for you. Once it''s confirmed, you can contact an intermediary to start the following steps:

1. Before selling the commercial real estate Miami property, which is also the first property, you must add some assisting clause or language into your Contract of Sale. The intermediary must also prepare documentations, which you also need to complete. During closing, the money will be delivered to the intermediary.
2. You must identify the property you want to buy or the Replacement Property in a period of two to three months after the sale of the previous property, also known as the Relinquished Property. It is possible to have three or more Replacement Properties to choose from but generally, the number of choices is subject to specific limits.
3. Lastly, you must obtain the Replacement Property within 6 months after selling the Relinquished Property. It is important that you have identified which property will serve as your Replacement Property prior to this step. Again, the proceeds of the sale will be delivered directly to the intermediary. You''ll receive the Deed of the Replacement Property after the closing.

Mark Michael Ferrer
Commercial Real Estate Miami