GROW YOUR INVESTMENTS TAX FREE

WITH YOUR QUALIFIED OPPORTUNITY FUND (QOF)

If you have capital gains, make sure you are not losing profit by unnecessarily paying taxes too soon. Instead of cashing out on your capital gains immediately, consider using a Qualified Opportunity Fund (QOF) to transfer your profits to a new investment and grow your gains tax-free.. 1031 Exchange Fund is here to help you navigate the best type of 1031 exchange to achieve your goals. As a self-directed QOF you choose your investments, you are in control. You can invest in real estate, a Qualified Opportunity Zone Business (QOZB) investment, or Qualified Small Business Stock (which provide tax-free sales after 5 years), and more to maximize your wealth.

Get in touch with one of our experts to find out more.

Play Video

Hot Topics

At Equity Advantage, we’ve worked with clients just like you since 1991 to deliver critical solutions in the area of 1031 exchanges, tax strategies, investment analyses, and more. As a Qualified Intermediary (QI), we provide the assistance our clients need to grow their wealth through tax-deferred investments.

A 1031 exchange is a rollover of proceeds from a sale of real estate to purchase another property. Also called a like-kind exchange or a Starker exchange, is a real estate term that refers to IRS code Section 1031. . The swap allows for the deferment of capital gains taxes.

The term 1031 exchange comes from the IRS code Section 1031. Though it is a noun, colloquially, those in the business have made it into a verb. They say, “Why don’t we 1031 that property for the one on 12th street,” for example.

Why would someone want to do a 1031 exchange? The main reason is to transfer the gain from the sale of one property into investment into another property, thereby deferring capital gains taxes. The 1031 exchange rules let you transfer your capital limitlessly from one property to one or more other properties with no time limit.

However, there is one catch: the minute you cash out, full taxes on those capital gains are immediately due. Still, there is a new way to avoid paying full taxes and eliminating all future capital gains taxes, and that is by 1031 exchanging into a Qualified Opportunity Fund (QOF). In this case, provided you follow the rules, you only have to reinvest your gains, not your basis, allowing you to receive that basis tax free now. You would only have to pay taxes on 90%of the gain in 2027 and are exempt from all future capital gains taxes on your new investments.

There are many reasons you may choose a 1031 exchange. A better property comes on the market, the property is fully depreciated and offering lower tax savings than a new investment would, or a shift in asset class or size. Primarily, 1031’s are used to defer paying capital gains taxes as you transfer the gains from one property to another. But there is more to gain than just tax deferment. A 1031 exchange is a strategy that helps investors leverage their gains by reinvesting the entire sales proceeds (rather than an after tax amount). Instead of holding a property and paying the mortgage off, the capital gains are used for another investment, earning even higher returns and creating more wealth for you.

A 1031 exchange can be done from property to property without limit, meaning investors can grow their investment portfolio as well as hedge their wealth and keep deferring taxes again and again. The frequency of exchanges has no limit either. As such, theoretically, a person could increase their investment with every exchange without paying taxes if they keep exchanging.

Some 1031 exchange rules should be kept in mind. One is that the properties involved must be like kind real estate properties (for the most part) unless you chose to invest in a Qualified Opportunity Zone Fund (QOF for short). Click below for my book on investing your gains in a QOF.

A critical rule to follow is to ensure the properties involved are like-kind, though likeness is flexible. Likeness is more about value than the type of property it is. If the value is similar and you are following the 1031 exchange rules at large, you can swap different kinds of properties for one another.

There is more than one kind of 1031 exchange, though the most common is the delayed exchange. In a delayed 1031 exchange, first you sell your property, then you identify 3 replacement properties that fall into the like-kind rule within 45 days. Finally, you must close on that 1 of those properties within 180 days of the sale of the original property. The IRS is merciless on these deadlines so do not miss them!

The reason the delayed exchange is so popular is that it allows investors the use of the entire sales proceeds, enough time to identify 3 replacement properties and conduct their due diligence without rushing..

The IRS has strict rules that must be abided by, and while there is flexibility in some of it, not following the rules means losing the benefits of the 1031 exchange. The strict rules are mostly regarding time and access to the sales proceeds. The 45 and 180-day deadlines must be made. Notably, the 45 days is included in the 180 days. A Qualified Intermediary (QI) must be used to accept the sales proceeds and disburse the funds for the purchase of the replacement property.

Additionally, within the 45-day period, upto three properties may be identified as replacement properties in writing. After the passing of that period, those properties cannot be changed. Our strong recommendation is to select a Qualified Opportunity Funds as your 3rd option. They close quickly, give you control of your funds, provide another 180 days to select a replacement investment, and remove the like-kind restriction (as long as the replacement is in a Opportunity Zone (OZ)).

Furthermore, the replacement property must cost equal or more than the relinquished property. If it costs less, you will have to pay capital gains on the difference (unless a QOF is used)

Another kind of 1031 exchange is the reverse exchange. Here, first you find a property you want to buy, then you buy it, then you sell your property afterward. This is a great option for anyone worried about the IRS’s deadlines and have the capital to close on the replacement property.

The reverse 1031 exchange is great for investors who find a great opportunity available immediately even though it might be more profitable to sell their own property later. This allows a person to take advantage of shifts in the market.

Reverse 1031 exchanges are a bit more expensive upfront than delayed 1031 exchanges.
First, with a reverse exchange, an investor needs the upfront capital to buy the replacement property without the sale of the original property. There are also fees involved in reverse exchanges that vary by state.

One of the most complex parts of a reverse 1031 exchange is the fact that the exchanger is not allowed to own the title to both properties at the same time, thus requiring what is called an Exchange Accommodator Titleholder (EAT) as an intermediary.

In reverse exchanges, the whole process must be completed within 180 days of the closing of the newly acquired property. That new property must be of equal or greater value than the current property that is to be relinquished. If not, a capital gains tax on the difference will apply.

An improvement exchange is a kind of 1031 exchange that allows the investor to improve a replacement property using equity from the property swap. Improvement 1031 exchanges are in conjunction with either a delayed or reverse 1031 exchange.

The improvement exchange allows the investor to use involved capital gains (that otherwise they would not be allowed to touch) to make improvements on the replacement property. Those improvements must be completed before the investor can acquire the legal title of the property, however. The deadlines for delayed and reverse exchanges apply, meaning they must be completed within 180 days. Think of it as rehab before you close.

The purpose of adding on an improvement exchange to either a delayed or reverse exchange is to get the most out of their tax-deferred money. Using it to improve the replacement property means it will eventually be worth more.

Upon completion of the improvements, the replacement property must be equal or greater in value than the relinquished property to qualify for tax deferment. Basic improvements are sometimes all it takes to bump up the sale value enough to protect the capital gains.

A blended exchange is the combining of delayed, reverse, and improvement 1031 exchanges into one exchange. The purpose of a blended exchange is to allow for advanced flexibility. This applies mostly to exchanges that involve more than two properties. They can have different structures depending on the goals of the investor to maximize profits.

Signup To Get The
1031 Exchange Book For Free

At Equity Advantage, we’ve worked with clients just like you since 1991 to deliver critical solutions in the area of 1031 exchanges, tax strategies, investment analyses, and more. As a Qualified Intermediary (QI), we provide the assistance our clients need to grow their wealth through tax-deferred investments.

At Equity Advantage, we’ve worked with clients just like you since 1991 to deliver critical solutions in the area of 1031 exchanges, tax strategies, investment analyses, and more. As a Qualified Intermediary (QI), we provide the assistance our clients need to grow their wealth through tax-deferred investments.

At Equity Advantage, we’ve worked with clients just like you since 1991 to deliver critical solutions in the area of 1031 exchanges, tax strategies, investment analyses, and more. As a Qualified Intermediary (QI), we provide the assistance our clients need to grow their wealth through tax-deferred investments.

KEEP IN TOUCH

Signup To Get The

1031 Exchange Book For Free