1031 Exchange Services in California

A 1031 exchange is a tax-deferment strategy for experienced real estate investors. A 1031 exchange is an Internal Revenue Service (IRS) tax rule that allows investors to exchange one investment property for another of equal or higher value and defer paying capital gains tax on the profits from the sale. This benefits those who want to upgrade a property without paying taxes on proceeds. A 1031 exchange applies to real property, primarily buildings and land.

Studies have shown that 1031 exchanges increase investment in the national economy, promote employment, and contribute to federal, state, and local tax revenue, giving investors ample real estate investment benefits.

How Does a 1031 Exchange Work?

Despite the complex rules and procedures, conducting a 1031 exchange is not as daunting as it may seem. Having a clear understanding and systematic approach can help ensure a smooth 1031 exchange process:

Identify property to sell: It must be an investment property, not a primary residence, and has increased in value since purchased.
Hire a qualified intermediary (QI): The IRS prohibits a seller from handling any funding between the sale and purchase of the properties and requires investors to hire a QI to hold funds.
Identify replacement properties: You must identify up to three potential replacement properties, regardless of their total value, within 45 days from the date of sale and provide the information to the QI in writing.
Purchase replacement property: You have 180 days from the sale date of your property to complete the purchase of any of your identified replacement properties. The QI will transfer the sale funds to the seller of the replacement property you are purchasing.
File Tax Form 8824: Include Form 8824 when filing your tax return, notifying the IRS of the exchange with information on the properties you sold and purchased.

What Are the Requirements for a 1031 Exchange?

The IRS strictly regulates the 1031 exchange. To qualify, you must meet specific requirements and adhere to certain rules, or the exchange may be disqualified and lead to potential capital gains tax liability. Requirements for 1031 exchanges include:

Properties must be like-kind and used for investment or business only.
Net market value and equity of the acquired property must be the same or greater than the property sold.
Name appearing on the property title and tax returns must be the same.
Investor must not have received any additional value in the exchange that is not like-kind, such as cash, property improvements, or debt relief.
All equity must be reinvested into the replacement property.
Both the sale and purchase cannot be an “arm’s length” purchase, which refers to family members or other parties for which you have a personal or close relationship.

What Are the Rules for Identifying Replacement Property?

Like-kind propertyis defined according to its nature or characteristics and includes a broad range of exchangeable properties. For instance, a commercial building can be exchanged for a vacant lot, or a residential property can be exchanged for industrial property. All properties must be of equal or greater value and acquired for investment purposes, not resale or personal use, typically involving a minimum ownership of two years.

To receive the full benefit of a 1031 exchange, you must meet one of the following rules defining identification:

Three-property rule: Identify three properties for potential purchase regardless of market value.
200-percent rule: Identify unlimited replacement properties provided the cumulative value does not exceed 200 percent of the sold property’s value.
95-percent rule: You can identify an unlimited number of properties provided you purchase properties valued at 95 percent of their total value or more.

What Properties Do Not Qualify for a 1031 Exchange?

The IRS specifically excludes certain properties from 1031 exchanges, such as stocks, bonds, notes, securities, and interests in partnerships. You cannot exchange an investment property for a personal residence, property in a foreign country, or “stock in trade,” such as purchasing and flipping a “fixer-upper” once improvements are completed.

You may also be barred from 1031 exchanges if you attempt to exchange a property too soon after requiring it or trade multiple properties in the same year. You must be able to demonstrate that the property was acquired and held strictly for investment, which requires proof of your purpose and motivation for purchasing the property, the length of time you held the property, and your principal business for owning the property.

How Can 1031 Federal Exchange Help Me?

At 1031 Federal Exchange, we represent clients throughout the country, including California, in numerous types of real estate exchanges. Our services include developing initial tax strategy, exchange management, tax compliance, tax opinions, consulting, and comprehensive QI services.

You need an experienced and qualified professional who handles 1031 exchanges on a regular basis, such as our California 1031 federal exchange professionals. In addition to providing comprehensive tax advice, our additional role as QIs is to:

Coordinate with you on the structure of the 1031 exchange.
Prepare documentation of the sale and replacement properties.
Provide the escrow or title company with instructions and appropriate documents regarding the exchange.
Create an arm’s length transaction in the agreement between the seller and QI.
Deposit funds from the sale property into a separate insured account.
Hold the sale funds during the 45-day identification period.
Hold written information regarding potential replacement properties.
Transfer funds to the title or escrow company to purchase the replacement property.
Convey the title to the seller or exchanger by deed.
Maintain complete and accurate records.
Provide you with 1099 forms and the IRS if needed.

Whether purchasing or selling, our highly qualified team consistently provides clients with personal attention and the safety and security necessary for all real estate investments and portfolio building.

Our Professionals at 1031 Federal Exchange Provide California Investors With Comprehensive Real Estate and Business Services

1031 Federal Exchange offers the knowledge, experience, and protections needed for successful real estate investing and portfolio-building. Call today at 513-488-1135 or contact us online to schedule a free consultation. Located in Loveland, Ohio, we serve clients nationwide.