December 12, 2023

What Should I Know About 1031 Exchanges in 2024?

By Kapil Patel, Attorney at Parikh Law Group

Whether you’re a seasoned real estate investor or a newcomer to the arena, the 1031 Exchange is a term you’ve likely come across in your research or networking. For those unfamiliar, 1031 Exchanges can seem intimidating, however their potential benefits are substantial. 

In this article, we will demystify the 1031 Exchange by explaining what it is, specifically how it works in Illinois, and how Parikh Law Group, one of the best real estate lawyer groups in Chicago, can support you through this process.

What is a 1031 Exchange?

A 1031 Exchange, named after Section 1031 of the U.S. Internal Revenue Code, is a strategic tool that allows an investor to sell a property and reinvest the proceeds in a new property while deferring all capital gains taxes. This can prove incredibly beneficial, allowing investors to leverage the full amount of their investment towards purchasing a potentially higher-value property.

Property Types That Qualify for an Illinois 1031 Exchange

In Illinois, as with most states, a variety of property types qualify for a 1031 Exchange. Qualifying properties must be held for investment or used in a trade or business. These can include rental and business properties, land, and even certain types of leasehold interests. It’s crucial to consult with a knowledgeable real estate attorney to ensure your property is eligible for this transaction category.

Types of 1031 Exchange Structures in Illinois

The following are common types of 1031 Exchange structures in Illinois:

  1. Deferred Exchange: This is the most common type. The investor has 45 days from the sale of the original property to identify potential replacement properties and a total of 180 days to close on a new property.
  2. Simultaneous Exchange: This occurs when the relinquished property and replacement property close on the same day.
  3. Reverse Exchange: This is when the replacement property is purchased before selling the original property. This can be more complex and requires an Exchange Accommodation Titleholder (EAT).
  4. Improvement Exchange: This allows the investor to use the exchange equity to improve the replacement property.

The type of 1031 Exchange structure you choose will depend on your specific circumstances and investment goals. For these types of transactions, it is essential to consult with a proficient real estate attorney.

Illinois 1031 Exchange Time Limits

For successful 1031 Exchanges in Illinois, timing is everything. As mentioned above, in a delayed exchange an investor has 45 days from the sale of the relinquished property to identify potential replacements and 180 days total to close on the new property. If these timeframes are not strictly adhered to, the exchange can fail, leading to potential tax implications and liabilities.

Steps To Complete an Illinois 1031 Exchange

The process of executing a successful 1031 Exchange involves several crucial steps. While the procedure may seem complex, understanding each phase can help you navigate this path with confidence. 

Here are the key steps involved in completing a 1031 Exchange in Illinois:

  1. Consult with a real estate attorney: Engaging the services of a skilled real estate attorney is crucial to navigating the complexities of a 1031 Exchange.
  2. Sell the relinquished property: The sales agreement should have a cooperation clause indicating the intent to perform a 1031 Exchange.
  3. Identify replacement property: Up to three properties can be identified as potential replacements within the 45-day window.
  4. Purchase replacement property: The purchase must be completed within 180 days of the sale of the original property.
  5. File the necessary paperwork: Documentation related to the exchange should be submitted with your tax returns for the year in which the exchange occurred.

While executing a 1031 Exchange in Illinois might seem challenging, with the right understanding and guidance, it can be a highly advantageous strategy. 

Our Real Estate Attorney at Parikh Law Group Can Help

1031 Exchanges are a potentially lucrative opportunity for real estate investors looking to defer capital gains tax. However, it’s a complex process requiring thorough understanding and meticulous execution. That’s where experienced real estate attorneys come in.

Parikh Law Group is committed to providing real estate investors with comprehensive support, from the initial consultation to the final property closing. We will work to ensure that your exchange meets all of the necessary guidelines and requirements, and that your investment is secure. Contact Parikh Law Group today and take the first step toward maximizing your real estate investment options in Illinois. Visit our website for more information about how we can help you.