Commercial Real Estate 1031 Tax-Deferred Exchanges Require Advance Planning and Coordination

To derive the maximum possible tax-advantaged benefit from a commercial real estate exchange, and properly comply with IRS Section 1031 Exchange timing and paperwork mandates, add an experienced legal advisor to oversee and coordinate the services provided by commercial real estate agents, CPAs and title companies.

We recently represented the participants of a commercial real estate tax deferred exchange involving three owner/landlords and two commercial properties, a triplex office building in San Leandro and a retail shopping center in Hayward.

• The transaction completed the second leg of two pending exchanges of commercial property and initiated the first leg of two new commercial property purchases.
• There were partnership, property tax and income tax issues that required careful coordination and contract drafting, the involvement of the parties’ CPAs, pre-closing deed work and property tax reassessment planning.

The transaction successfully closed with the involvement of three real property exchange intermediaries and a sophisticated title officer that handled the escrows. We drafted the contracts, coordinated the real estate transaction and counseled our clients to a successful closing that easily met the strict deadlines of the IRS Section 1031 tax-deferred exchange guidelines.

The case reinforces the need for owners and landlords of commercial real estate to seek counsel well in advance of any sale, lease or exchange of commercial real estate, especially in a tax deferred exchange situation where various identification and closing deadlines are specific and mandatory to preserve the ability to defer capital gains taxes.