Reap the Tax Benefits of a 1031 Exchange
If tax concerns have clouded your plans to sell your cellular, billboard, solar or wind lease, consider a 1031 exchange. A 1031 exchange, named after a section of the Internal Revenue Code, allows you to keep all of the proceeds from the sale of your property as long as you invest them in a like-kind property. That means any property held for productive use of trade or business or for investment can be exchanged for any other property held for productive use in trade or business or for investment – that’s the definition of like-kind.
In effect, you can change the form of your investment without (as the IRS views it) cashing out or recognizing a capital gain. That allows your investment to continue to grow tax deferred. There’s no limit on how many times or how frequently you can do a 1031. You can roll over the gain from one piece of investment real estate to another to another and another. Although you may have a profit on each swap, you avoid tax until you actually sell for cash in the future.
But if a 1031 exchange is about selling one property and buying another, how can you participate by selling your billboard or cell tower lease? The answer is that by placing an easement under the billboard site (which can simply mirror the existing easement, if there is one), your billboard lease sale turns into a real property sale, generally making it eligible for a 1031 exchange. Having an easement generally does not affect your ownership of the land, including your ability to sell it.
The Key Benefits of a 1031
- Preserves all of the equity in a property
- Increases your purchasing power, allowing you to buy a more expensive property than if you had to pay capital gains tax on the sale of your property
- Diversification of your investments without paying an immediate tax consequence
When you sell the “relinquished” property and purchase the “replacement” property at a later date, it’s called a delayed exchange. The “exchange period” time limit to buy a new property is 180 calendar days or your next tax filing date, whichever is earlier.
You also have to identify the replacement property or properties within 45 days of selling your relinquished property. This 45-day timespan is called the “identification period” and it is part of the 180-day exchange period. You may identify up to three properties of like value or as many properties as necessary to total the fair market value of the property you are exchanging.
The 1031 exchange rule also governs the proceeds of the sale. A qualified intermediary (QI) must handle the proceeds from the sale. You or your agents or anyone else cannot receive or manage proceeds or they will become taxable. Keep in mind also that all proceeds from the original sale of the relinquished property has to be reinvested in the new property. Any proceeds retained are taxable.
A 1031 exchange also requires that the replacement property must have the same or higher level of debt than the relinquished property sold. If it falls short, the buyer will either have to put more money into the replacement property or pay taxes on the shortfall.
If you are uncertain about selling your lease, we understand. That’s why we welcome you to call us so we can discuss every aspect of a billboard or cell tower lease buyout. There is never a cost or obligation to speak with us. Landmark Dividend has helped thousands of property owners achieve greater financial flexibility and security.
IMPORTANT TAX NOTICE: Landmark does not provide advice on any income tax, capital gains tax or other tax requirements or issues related to any transaction in which Landmark is a party or participant in any fashion. Use of any information obtained from Landmark or its affiliates or agents or referral by Landmark or its affiliates or agents is for general information only and does not represent tax advice either express or implied. You are encouraged to seek professional tax advice for tax questions and assistance. The information above is provided as a general introduction to the 1031 exchange process. Prospective sellers and buyers of real estate should always consult their attorney and tax advisor prior to entering into a 1031 transaction.