1. Notify your client if property being sold could qualify for section 1031 treatment
Section 1031 applies to real property held for use in a trade or business or for investment. If the real estate deal that you are working on involves business-use or investment real property, the property may qualify for section 1031 treatment, so let your client know about section 1031. It is not uncommon for a seller to show up at closing, learn that the buyer is acquiring the property to complete a section 1031 exchange, and realize that section 1031 might help the seller defer gain. Although the seller may be able to alter course that late in the transaction and still structure the sale as part of a section 1031 exchange, that last-minute rush makes it difficult for parties to review exchange documents and make sure everything is in order for the closing.
Real estate attorneys should let their clients know about section 1031 well before they get to the closing table. Property held primarily for sale and property held exclusively for personal use does not qualify for section 1031 treatment. Real estate attorneys should let their clients know that any other type of real property might qualify for a section 1031 exchange. To be safe, real estate attorneys should suggest that their clients consult tax experts to assess the viability of doing a section 1031 exchange of any property if there is a chance that their clients will reinvest the proceeds in other real property. It would be a shame for a property owner to sell property, pay tax, and reinvest the remaining exchange proceeds in property that would have satisfied section 1031. Such lost opportunities can be costly, and clients should have a say in the decision to do or not do a section 1031 exchange.
The Practical Real Estate Lawyer
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