Many people are unaware of how powerful and easy it is to use a tax-deferred 1031 exchange. However, there are several misconceptions about 1031 exchanges, largely due to a lack of understanding and planning. Below are some things you should know if considering a 1031 exchange.
“Like-Kind” Property
The “like-kind” property provision does not require selling and buying the exact same property type. You can sell a rental house and buy office, commercial, retail, industrial, multifamily, raw land, or agricultural space.
Reverse Replacement Property
Reverse exchanges need to be set up before closing on the replacement property. It must be set up with your qualified intermediary (QI) before closing.
Partial Exchange Improvements
You can purchase lower-valued replacement property with a 1031 exchange. However, that makes your exchange a partial exchange without a 100 percent tax deferment. Also, you cannot use exchange proceeds to make improvements through a delayed 1031 exchange.
Disaster Relief Extensions
If your 1031 exchange property is in an area affected by a federally declared natural disaster, you may qualify for an extension to your 45-Day identification and 180-day exchange period deadlines. Extensions are not automatic; paperwork must be filed with your QI.
ID Deadlines & Extensions
The 1031 exchange rules provided by the IRS are strict, with no exceptions. To be eligible for tax deferral, the potential property must be identified within 45 calendar days and acquired within 180 calendar days from the transfer of the relinquished property.
Vacation and Second Homes Usage
There are strict IRS rules for 1031 treatment regarding personal use for vacation or second homes. During the initial 24 months of the property ownership, you can only use it for 14 days each year or 10 percent of the days you rent out the property.
Owner-Occupied Eligibility
The IRS allows using a 1031 exchange for the investment portion of a property. If the property is a primary residence, the investment portion may qualify for a 1031 exchange, and the portion where the owner lives may be eligible for the primary residence exclusion.
Vacant Land
Vacant land does qualify for 1031 treatment, provided the land is being held for business or investment purposes. This also applies to farms, ranches, raw land, and mixed-use property with a primary residence.
Net Sales Proceeds
To qualify for full tax deferral, you must purchase a replacement property equal to or greater value than the relinquished property sold without using your proceeds or gain. Property values are based on the overall contract sale price.
Replacing Debt
You do not need to replace the value of the debt paid off on the relinquished property with a new loan on the replacement property. You can replace the value of the debt paid off with cash from outside of the 1031 exchange through seller financing or obtaining a loan from a bank or private party.
1031 Federal Exchange Provides Comprehensive 1031 Exchanges Services Nationwide
To learn more about 1031 exchanges, contact our tax and business professionals at 1031 Federal Exchange. Call us at 513-488-1135 or contact us online to schedule a free consultation. Located in Loveland, Ohio, we serve clients nationwide.