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1031 Exchanges in Colorado

1031 Exchanges in Colorado | Boulder Real Estate Agent

Section 1031 exchanges are a unique tax deferral technique. The idea is that, other things being equal, a genuine exchange of two similar things (like-kind) should not constitute a taxable event. In the context of real estate it is almost universally a situation in which a seller wants to sell an investment/rental property and use the proceeds to purchase another one. The seller wants to limit, to the maximum extent possible, any capital gains taxes that are owed due to the transaction. While this write up is designed to provide an overview for general, educational purposes, it is by no means compressive and does not constitute legal advice. Before doing anything related to a 1031 exchange you should consult with an attorney, a CPA and/or a qualified intermediary.

1031 exchanges require language to be inserted into the real estate contract that states that the transaction will be structured as a simultaneous exchange of like-kind properties. Typically the seller is designated as the electing party and the buyer is designated as the non-electing party. The contract is in turn assigned to a “qualified intermediary” and the buyer must cooperate in effectuating the transfer.

Because 1031 exchanges are creatures of federal law there is very little difference between a 1031 exchange that takes place in the City of Boulder, or the State of Colorado, and one that takes place in any other state. Depending on the state there may be some differences with regard to contract language and procedures that are employed, but, overall, the procedures are the same across the country. Often a seller of Colorado real estate will use the 1031 exchange process to purchase a property located in another state. Such a transaction is usually fine as long as the applicable rules, procedures, and timelines are carefully adhered to.

It is important to note that 1031 exchanges generally only defer tax liability, rather than eliminate it. The exception to this general rule is if the property owned by the electing party is transferred upon that person’s death. In that case the recipients of the decedent’s property will receive what’s called a stepped-up basis, with the tax basis for capital gains tax purposes being “stepped-up” to the fair market value of the property at the time of death. These rules are complex. As stated previously, be sure to consult legal and tax counsel for advice tailored to your specific circumstances.

While it is essential to have the right legal and tax advice and representation when dealing with a 1031 exchange it is also essential to have the right Colorado real estate agent on your side. As your agent Ashley Newell can help you with the sale of your rental/investment property and work alongside your attorney, CPA and/or qualified intermediary to ensure that the 1031 exchange process goes as smoothly as possible.