1031 Exchange FAQ's
The "1031 Exchange" has been around since 1921. Section 1031 is an exception in the tax Code that allows Capital Gain Tax to be deferred when investment property is "exchanged" as opposed to "sold." The policy behind section 1031 is that Taxpayers should be able to dispose of investment or income property and be able to acquire replacement investment or income property without incurring the large cost of the Capital Gain Tax.
Who Can Take Advantage of 1031's?
Any tax paying entity such as corporations, partnerships, individuals, LLC's, trusts, or foreigners who own property in the U.S. can take advantage of section 1031.
What are the requirements to do a 1031?
There are four basic requirements that the Taxpaying entity must meet is order to complete a 1031.
The first requirement is that the transaction must involve a transfer of Real or Personal Property. Examples of Real Property would be apartments, shopping centers, medical facilities, warehouses, factories, hotels, casinos, water rights, vacant land, and of course your single family residences and condos/townhomes. Personal Property would be property such as airplanes, boats, tractors, licences, copyrights, and various equipment.
Property that would be excluded from 1031 treatment would be property such as stocks or bonds, interests in a partnership, primary residences, good will, or inventory (property held primarily for resale).
The second requirement is that the property must be held for a qualified purpose, either as an investment, or used in a trade or business. This purpose for holding is fact sensitive, determined at the time of exchange, and applies to both parties.
The third requirement is that the relinquished property must be a like- kind with the replacement property. In other words you cannot exchange personal property or cash for real property or vice versa.
The fourth basic requirement is that the transaction must be an Exchange as distinguished from a sale with a new purchase. The proper exchange documents must be in place prior to the close of escrow in order to Exchange the property. Otherwise, you are left with a sale with a new purchase.
Can I exchange a house for a condo?
Yes, because you are trading for like-kind property (real property). You must, however, trade even or trade up in sales price. If you sell the house for $300,000, then you must trade for a like-kind property that is $300,000 or more. Also, all the cash or equity from the sale of the house must be applied towards the purchase of the condo. This stands true for all exchanges.
How long do I have to purchase a property after the sale of my investment property is complete?
You must identify a property no later than midnight of the 45th after the close of escrow of the property being exchanged. Identify meaning the purchase agreement for the new property must be in writing, signed by all parties, and sent. You then have 180 days from the close of escrow of the property being exchanged to complete the sale of the new property.
Is there only one type of 1031 Exchange?
No. There are actually many different types of 1031 Exchanges. Some of the most popular are the deferred, simultaneous, construction, reverse, reverse construction, and personal property. Contact your local Exchange company to see what one is best for you.
What is a Reverse Exchange?
A Reverse Exchange is a 1031 transaction where the replacement property is aquired before the relinquished property is transferred. This type of exchange is more complex than a standard exchange and usually has higher costs and more requirements.
What do I need for a valid exchange?
You must always have the proper exchange documents ready before the sale of the property being exchanged closes escrow. These documents prove intent, prevent constructive receipt, and provide an accommodating party. An Exchange company will take care of these for you.
1031 Exchange links:
Land America Exchange Services
First American Exchange Company
Investment Property Exchange Services, Inc.
All information deemed reliable but not guaranteed. Do not consider any part of this webpage as legal advise. Contact your local exchange company for more info or for exact pricing quotes.
