1031 Exchange

  • A 1031 Like-Kind Exchange allows an investor or business owner to sell investment property and replace it with another property (passive or active ownership) of equal or greater value within a timeframe of 180 days from the date of close using a qualified intermediary. If all the criteria are met the investor can defer taxes on up to 100% of capital gains created from the sale of the original property.Some form of 1031 Like-Kind exchanges have been around since 1921.
  • Please see our 1031/DST Information Kit for additional background information.
  • Properties must be like-kind.This doesn’t mean they have to be the same property type. It means they need to be an investment property to investment property. For example, if I own a duplex/multi-family house you don’t have to exchange into another duplex/multi-family. You could exchange your duplex/multi-family into a strip-mall or an industrial warehouse. Or if you owned raw land, you can exchange it into a commercial building. There are two ways to think about replacement property. If you want to be an active landlord or a passive landlord. If active, then look for an investment property in your local area or comfort zone. If passive, then there are fractional ownership structures that can provide potential for monthly income, professionally managed, and a number of other features. Please reach out to our firm to learn more.
  • Yes, the IRS has strict timeframes and guidelines when it comes to conducting and completing a 1031 Like-Kind Exchanges. If you are contemplating a 1031 Like-Kind Exchange we recommend to start speaking with a Qualified Intermediary (QI) sooner rather than later before the close. The timeframe starts on the day you close on your relinquished property. You have 45 days to identify potential replacement properties and another 135 days to acquire the replacement property. So the total time frame is 180 days to complete the whole exchange from start to finish. Again, a good QI will guide you through the process.
  • A QI will also need to receive and transfer the funds. You as the exchanger cannot take constructive receipt of the sale proceeds. If you do the exchange is null and void.
  • There are three common types to identify replacement properties with your QI. There is the “3 Property Rule”, “200% of exchange value” and “95% Rule”. Below are some brief descriptions. Your QI will be able to give you a more detailed answer on the below.
  • 3 Property Rule
    • During the 45-day identification process, you could use this option to identify up to 3 properties. If you do list 3, it does not mean you will have to buy all 3. One reason to use this option is to give you a few back-ups in case your initial deal falls apart.
  • 200% of exchange value
    • During the 45-day identification process, you could use this option to identify as many properties as you want as long as they don’t exceed 200% of the value of your original property sold.
  • 95% Rule
    • During the 45-day identification process, you could use this option to identify as many properties as you want. However, you must close on 95% of the value that you identify. Most investors shy away from this option because of the requirement to purchase 95% of the value that is identified.
  • No, you don’t need to put all the proceeds into the exchange. You can do a partial but you will be taxed on any amount that is not equal or greater in value of the original exchange amount. Also, as a reminder you are able to exchange partially into an active or passive

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The Investor’s Guidebook

A 1031 exchange is a big commitment, but it doesn’t have to be difficult. The key is planning, and that’s why we’ve created an investor’s guide to 1031 exchange investing. It tackles the art and science of completing your exchange, and the pitfalls to avoid.

What is a 1031 Exchange? features helpful charts, diagrams, timelines and concepts with non-technical language.

  • What is a 1031 exchange?
  • The pros and cons of a 1031 exchange.
  • How do you qualify?
  • Detailed descriptions of a 1031 exchange process.
  • How to defer your taxes.

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