1031 Exchanges FAQ
Who Can Utilize a 1031 Exchange?
A wide variety taxpayers can utilize a 1031 exchange, ranging from small to large investors. Between 10 and 20 percent of all commercial real estate transactions involve a 1031 exchange. “Like-kind exchanges” benefit investors of all sizes.
Does My Property Qualify for a 1031 Exchange?
Any property held for investment purposes or productive use in trade or business can be exchanged for another “like-kind” property. The focus of “like-kind” is the nature of the investment property rather than its precise form. For example, a single-family residence can be exchanged for a duplex, vacant land for a shopping mall, an office for apartments, or any combination depending on the exchanger’s investment strategies and goals.
What Does Not Qualify for a 1031 Exchange?
The IRS specifically excludes some property from 1031 exchanges, particularly those involving stocks, bonds, notes, securities, and interests in partnerships. An investment property cannot be exchanged for a personal residence, property in a foreign country, or what is considered “stock in trade.” For example, if an investor buys a fixer-upper and flips it as soon as improvements are made, the properties may be considered as stock in trade. This is also the case if an investor attempts to exchange too quickly after a property is acquired or trades many properties within one year. Investors must be able to prove the property was acquired and held strictly for investment, with proof of the purpose and motivation behind the acquisition and use of real estate, how long the property is held, and that the principal business of the owner were all taken into consideration. Although primary residences typically do not qualify for an exchange because they are not used in investment or business, the portion of a primary residence that is used in a trade, business, or for investment may qualify for a 1031 exchange.
How Do I Get Started with a 1031 Exchange?
Getting started with any kind of exchange is as simple as contacting a reliable 1031 exchange services law firm that can also serve as a Qualified Intermediary. A successful 1031 exchange requires thorough planning, and unlike most QI companies, we are qualified to give legal advice regarding the 1031 exchange process. It is helpful to have relevant information regarding all parties to the transaction available for your initial consultation.
Our firm takes a proactive approach to preserve our clients’ best interests and strives to understand their overall objectives. We are ready to ask and answer all important questions in order help you achieve personal and professional financial success and reach your real estate goals.
What Are the Timelines in a 1031 Exchange?
An investor has 45 days from the date of closing on the relinquished property to identify potential replacement properties, and a total of 180 days from closing to acquire the replacement property. It is important to remember that the 45 day and 180 day periods run concurrently, and if multiple properties are involved, the clock starts running on the closing date of the first property. Failure to adhere to these stringent deadlines can result in disqualification from a 1031 exchange.
What Are the Rules for Identifying Replacement Property?
An “unambiguous description” of the potential replacement property is required on or before midnight on the 45th day after closing on the relinquished property. This generally involves a legal description and property address, something a 1031 exchange interemediary will ensure is done properly. If you are considering multiple properties for purchase, your options include:
- Identify up to three properties of any value with the intent of purchasing at least one of them.
- Identify more than three properties with a total value that does not exceed 200 percent of the relinquished property’s market value.
- Identify more than three properties with a total value exceeding 200 percent of the relinquished property, understanding that 95 percent of the market value of all identified properties must be acquired.
Can I Do a 1031 Exchange After Closing?
It is not uncommon for investors to intend to affect a 1031 exchange but receive proceeds after the relinquished property sale closes, thereby disqualifying the transaction as an exchange for capital gains tax deferment. However, with coordination among the buyer and other parties to the transaction, and assistance from an experienced 1031 exchange intermediary, it may be possible to rescind the initial transaction and go forward with a 1031 exchange.
Do 1031 Exchanges Involve Shorter Holding Periods?
Investors utilizing a 1031 exchange generally have shorter holding periods than those who do not engage in like-kind exchanges. 1031 investors who utilize like-kind exchanges typically put more capital into their replacement properties and take on less debt than buyers who are not tax-motivated. These lower loan to value ratios decrease risk in our financial system.
What Are Other Benefits to 1031 Exchanges?
Study show that 1031 exchanges increase investment in the United States economy, promote job growth and labor income, reduce impediments to transfers, contribute to our country’s gross domestic product, reduce the cost of capital, and contribute to federal, state, and local tax revenue. For these reasons, 1031 investors are also provided with many real estate investment benefits.
1031 Intermediaries at 1031 Federal Exchange Provide Comprehensive Services to Real Estate and Business Clients
Whether you are selling real estate property, buying it, or both, the skilled team at 1031 Federal Exchange will provide you with the personal attention and safeguards you need for successful real estate investing and portfolio development. Call us at 513-450-3039 or contact us online to schedule a free consultation.