1031 Exchange Information

What is a 1031 Tax Deferred Exchange?
Generally, when individuals sell real estate, they have to pay tax on the gain from the sale of the property. This gain is caused either by the property appreciating over time or by depreciation deductions taken by individuals for tax purposes. With a 1031 Tax Deferred Exchange, your gain is carried forward to the replacement property. If you sell the replacement property in the future, without exchanging, the gain would be taxed at that time.

What kinds of properties are eligible?
Section 1031 of the Internal Revenue Code allows for a taxpayer to exchange one property for another and defer payment of state and federal capitol gains taxes, as long as both properties are of "like kind". That is, the properties must either be held for productive use in a trade or business or be held for investment.

For example, bare land may be exchanged for a ski condo, rental home or apartment building and vice versa. It cannot, however, be exchanged for a personal residence because a personal residence does not qualify for tax deferral under Section 1031.

Must the properties be located in the same city or state?
Exchange properties can be located in different states within the USA. For instance, a beach house in Florida may be exchanged for a ski condominium in Jackson Hole.

Does the exchange of properties have to be done simultaneously?
The sale of one property and the purchase of another for a 1031 exchange can be accomplished with a Simultaneous 1031 Exchange or Delayed 1031 Exchange. With a "Delayed Exchange" there are time constraints that must be met in order to qualify for tax deferral. The Exchanger has 45 days from the sale of one property to properly identify a replacement property and 180 days to complete the acquisition of the replacement property. If you find a property you would like to acquire before you have been able to sell your current property you would be a candidate for a Reverse 1031 Exchange.

Is a 1031 Exchange 100% tax deferred?
For an exchange to be 100% tax deferred, the Exchanger must 1.) purchase a new property (properties) that is (are) of equal or greater value and 2.) reinvest all of the net proceeds from the sale of the old property.

It is perfectly acceptable to take cash ("boot", IRS term) out of a 1031 exchange and pay taxes on that amount.

Note: the Exchanger must acquire debt that is equal to or greater than the debt that was paid off. If the Exchanger does not acquire equal or greater debt on the new property, they are considered to be "Relieved of Debt", which is perceived as taking a monetary benefit out of the exchange. Therefore the debt relief portion is taxable, unless offset by adding equivalent cash to the transaction.

How would I do a 1031 Tax Deferred Exchange?
One of the requirements of a 1031 Tax Deferred Exchange is that you use a Qualified Intermediary ("QI"). The QI cannot be someone with whom you have a prior business or family relationship. Thus, your real estate agent, your accountant, your brother, for example, are disqualified. You must use an independent organization whose only contact with you is to serve as the QI. The QI prepares the exchange documents, holds the cash proceeds from the sale (required in order to qualify for a 1031 exchange), and should answer any questions you have during the exchange. Another requirement is that the person or entity that holds title on the old property must be the person or entity that takes title to the new property. Examples of entities holding property are trusts, corporations, partnerships, and LLC's.

Exchanging can save you significant tax dollars. It is an inexpensive and simple process if you have the right team working for you. Your real estate agent should know and understand the contract verbiage and the time constraints of the 1031 exchange.

1031 Qualified Intermediaries

Professional Exchange Accommodators, LLC

Englewood, CO
1-800-895-3520
www.1031pros.com

Equity Preservation, Inc.

San Jose, California
1-800-336-1031
www.equitypreservation.com

Asset Preservation, Inc.

Granite Bay, California
1-800-282-1031
www.apiexchange.com