A 1031 exchange lets an investor defer capital gains tax by exchanging one investment property for another of like kind. The exchange itself is a tax matter for your CPA and qualified intermediary, but several steps in it depend on a credible property value. That is where a commercial appraisal comes in.
Deferring the full gain generally requires buying replacement property of equal or greater value than the property sold, and reinvesting all of the net proceeds. Any cash or non-like-kind value you take out is called boot and can be taxable. Knowing what each property is actually worth, not just what the contract says, keeps the exchange on target.
If you are selling, an appraisal supports your pricing and gives you a documented value for the exchange file. It is also useful when the sale is between related parties or is not an arm's-length transaction, where an independent value helps show the price was fair.
Replacement property has to be identified within 45 days of closing the sale and acquired within 180 days. That is a tight window, so many investors order an appraisal on a target property while they are still negotiating. Lenders financing the replacement property will also require their own appraisal, and they will not always share how it came out before you are committed.
The split between land and improvements on the replacement property drives how much can be depreciated. An appraisal can support a reasoned allocation, which your CPA can use alongside a cost segregation study if one makes sense for the new property.
A Certified General Appraiser develops an opinion of market value for a stated effective date and intended use, in a report that follows USPAP. The appraiser does not advise on whether an exchange qualifies, how to structure it, or what tax results from it. Those questions belong to your tax adviser and qualified intermediary.
Tell the appraiser up front that the assignment relates to a 1031 exchange and share your deadlines. Provide leases, rent rolls and operating statements early. If you are comparing several replacement properties, ask about the timeline for each before you commit to a contract.
This article is general information, not tax or legal advice. Consult a qualified tax adviser and qualified intermediary about your exchange.