Specialty 1031 Exchange

What is It?

An engineered 1031 exchange is a specialized type of 1031 exchange that involves careful, strategic planning and analysis to optimize the tax benefits of deferring capital gains taxes on real estate transactions. While the basic structure of a 1031 exchange allows property owners to defer paying capital gains taxes on the sale of investment properties by reinvesting the proceeds into like-kind properties, an engineered 1031 exchange goes a step further by using advanced planning techniques and customized strategies to maximize the overall benefits of the exchange.

Cost segregation offers several benefits in an engineered 1031 Exchange. Specialty Tax Advisors will work with you on the following to ensure your taxes are calculated correctly during the exchange and upon selling the property. The accelerated depreciation claimed on a previously conducted Cost Segregation Study reduces the tax basis in the property. This may increase the capital gain from the sale, which will be deferred if the proceeds are reinvested in a like-kind property. A new Cost Segregation Study on the replacement property will accelerate depreciation. This provides significant tax deductions and enhances cash flow. When selling the replacement property without another 1031 exchange, there might be a liability for depreciation recapture on the part of the gain related to claimed depreciation deductions.

An engineered 1031 exchange can be particularly useful for more complex real estate transactions, such as involving multiple properties, reverse exchanges, or creating a more tax-efficient strategy. If done correctly, it offers significant long-term benefits, especially in terms of tax deferral and investment growth.

What Services are Included?

Who Qualifies?

To qualify for a 1031 exchange, the property must be held for productive use in a trade or business or for investment purposes. Properties held primarily for personal use, such as a primary residence or a second home, generally do not qualify for a 1031 exchange. Additionally, property held for sale, such as a fixer-upper or vacant land intended for development, does not qualify. The exchanged properties must also be located within the United States.

The properties involved in the exchange must be of like-kind, meaning they must be of the same nature or character, though differences in grade or quality are permissible. Real properties are generally considered like-kind, regardless of whether they are improved or unimproved. Examples of qualifying properties include residential, commercial, industrial, or retail rental properties. However, personal property, such as machinery, equipment, vehicles, artwork, and collectibles, no longer qualifies for a 1031 exchange as of January 1, 2018.