1031 Exchange

Most Common: The Exchanger has 45 days (Identification Period) from the Relinquished Property’s date of closing to identify up to three (3) Replacement Properties to the qualified Intermediary.

• Then the Exchanger has 135 days to close on the Replacement Property, for a total of 180 days from the date of the first close to the date of the second close.

• Failure to adhere to both exchange deadlines will disqualify the exchange.

• The Exchange must close on the Replacement Property before the earlier of the 180 day period or the due date of the Exchanger’s federal income tax return. However, for tax return dates that fall before the 180 days, a tax return extension can be filed.

Variation #1: The 200% Rule: The Exchanger can identify more than three (3) properties if the properties’ combined fair market value does not exceed twice the fair market value of the Relinquished Property.

Variation #2: The 95% Rule: The Exchanger can identify any number of properties if 85% of the total value of the named properties is acquired within the exchange period.

What are the types of Exchanges?

• Full Exchange • Partial Exchange • Delayed Exchange- is a transaction where the Exchanger receives like-kind properties after they have sold their existing property, rather than requiring a simultaneous exchange. The Delayed Exchange is subject to the timetables listed above. • Reverse Exchange- is a transaction where the Exchanger buys a Replacement Property before selling his existing property. This happens when an investor finds an ideal Replacement Property that may not be available at a later date.

What are the general guidelines to follow in order to properly execute a 1031 Exchange? 

• The Replacement Property’s Value, Equity and Debt must be equal to or greater than the value of the Relinquished Property. • All of the net proceeds from the sale of the Relinquished Property must be used to acquire the Replacement Property. • Timelines must always be met!

Further Rules

Boot: This comprises of any funds received from the Relinquished Property sale but not utilized in the exchange for the Replacement Property that will be subject to income tax. Continuity of Title: The Exchanger must take title to the Replacement Property using the same entity that previously held the Relinquished Property.

What does the term “1031” refer to?

1031 is the number assigned to the Internal Revenue Code Section (IRC § 1031) that provides for the tax deferred exchanges of real and personal property. 

What occurs in a 1031 Exchange?

When you sell a property you must recognize the gain or loss in the transaction. Any gain is subject to Federal Capital Gains tax, potential state income tax and depreciation recapture taxes. But Section 1031 does not recognize gain in the exchange of property held for investment or business if the property is exchanged solely for property of like-kind. 

What qualifies as a “like-kind” property?

“Like-kind” property means any other investment property, never a personal residence (unless it has been rented to another party for at least one year). 

Can I escape paying taxes in a 1031 Exchange?

No*, a “like-kind” exchange is tax-deferred, not tax-free. If and when the replacement property is ultimately sold (not as part of another exchange), then the original deferred gain plus any additional gain realized will be subject to taxation.