THE OKLAHOMA BAR JOURNAL 42 | JUNE 2024 Real Property The Basics of a 1031 Like-Kind Exchange By J. Max Nowakowski Statements or opinions expressed in the Oklahoma Bar Journal are those of the authors and do not necessarily reflect those of the Oklahoma Bar Association, its officers, Board of Governors, Board of Editors or staff. Section 1031 is a key provision of federal tax law that can drive investment strategy. At a high level, it offers a valuable opportunity for taxpayers to defer capital gains taxes on the exchange of like-kind properties; this is not a tax savings loophole but an indefinite tax deferral procedure that incentivizes taxpayers to reinvest their real estate sale proceeds. Section 1031 states, in part, “No gain or loss shall be recognized on the exchange of real property held for productive use in a trade or business or for investment if such real property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment.”2 The modern-day definition and framework for the tax-deferred like-kind exchange has evolved from its inception in 1921 through multiple amendments to the Internal Revenue Code and numerous Internal Revenue Service (IRS) rules and regulations. Taxpayers in an exchange will sell a “relinquished property” and obtain a “replacement property” using some or all of the proceeds from the relinquished property sale that would otherwise be subject to capital gains tax. Exchanges are reported on IRS Form 8824.3 EXCHANGE STAKEHOLDERS The beneficial property owners, meaning buyers and sellers, are the primary individuals and entities in an exchange. A qualified intermediary (QI) is used in the vast majority of exchanges, even if just for safe harbor protection. QIs are third-party fiduciaries who receive relinquished property sale proceeds, secure funds in escrow and help inform parties of relevant deadlines.4 Attorneys can be QIs but cannot provide any other advisory or representation service to the same client on the same transaction. Professionals and agents are the final group of exchange facilitators. Any number of various professionals may be involved in an exchange: real estate agents and brokers, bankers, surveyors, accountants and attorneys. If not acting as a QI, attorney services in 1031 exchanges are comparable to other real estate transactions: drafting letters of intent and written agreements, conducting title reviews and curing title issues, obtaining and reviewing tenant leases, facilitating physical and environmental inspections and reviewing reports, maintaining contract deadlines and generally assisting with the transaction through closing. OKLAHOMA HAS EMERGED AS AN INCREASINGLY ATTRACTIVE DESTINATION for real estate investors, both foreign and domestic. With diverse economic sectors and a favorable business climate, our state offers a wealth of investment opportunities across various asset classes. It is important for legal professionals who counsel real estate investors to understand the unique dynamics of the Oklahoma real estate market and the intricacies of popular tactics and methods, such as a Section 10311 like-kind exchange (1031 exchange).
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