1031 Exchanges made simple

One of the most common questions asked is whether or a not a vacation property qualifies for a 1031 exchange. There are three basic rules for including a vacation home in a 1031 exchange that were introduced by the IRS in 2008.   For a vacation home to qualify as relinquished property in a 1031 exchange, first the vacation home must have been held by the taxpayer for a minimum of 24 months immediately preceding the exchange. Second, the vacation home must have been rented at fair market value for at least 14 days in each of the 12-month periods. Third, the property owner cannot have used the vacation home personally for more than 14 days or 10% of the days the home was rented out (whichever is greater) within both 12-month periods.   The rules for a vacation home as a replacement property are the same as above. The property must be held for a minimum of 24 months after the close of the exchange; the property must be rented out at fair market value for at least 14 days ...

All 1031 exchanges regardless of the type have a 45-day identification period and a 180-day exchange period.   For a 1031 exchange to be in accordance with IRC § 1031, within 45-days of the close of the sale of the Relinquished Property the taxpayer must identify their potential replacement property(ies) in writing to the qualified intermediary. The replacement property(ies) description must be unambiguous and specific using a physical address or legal description.   In relation to the 45-day identification period, there are rules that a taxpayer must follow when identifying their potential replacement property(ies). There are three distinct identification rules that the taxpayer can use, and they can choose the appropriate rule for their specific exchange situation. The three rules are as follows:   1.       3-property Rule: A taxpayer can identify up to three properties without regard to the fair market value of the properties and th...

In order to defer ALL capital gains and depreciation recapture taxes from the sale of the Relinquished Property the taxpayer must pay an equal or higher price for the Replacement Property than the Relinquished Property was sold. Should any debt or amount not be reinvested this portion, called boot, would be taxable.    Boot is any non-like-kind property or properties that does not qualify, which could include cash, notes, partnership interests, securities, inventory, or property held primarily for sale not investment, etc. Boot is categorized in two types: cash boot, which is cash received, and mortgage boot, which is any reduction in loan or debt on the exchange. Any boot received during a 1031 exchange is subject to taxation as either depreciation recapture or capital gain.   It is important to note that any credits on the settlement statement directly paid out to the taxpayer may also result in boot and a taxable event. If certain situations are not handled pro...

Below is a simple guide that can help determine if your situation qualifies for a 1031 exchange and if a 1031 exchange seems like the best option for your upcoming real estate transaction.   Do you, or your entity, pay US taxes? If yes, then you are eligible for a 1031 exchange.   Is the property you are selling “real property” that has been held for business or investment use? If yes, then the property should qualify for a 1031 exchange.   Are you planning on reinvesting the full sale proceeds from the sale of your property into another property that will be held for business or investment use? If yes, then you qualify for a 1031 exchange. However, if the answer is no, perhaps you plan to reinvest your proceeds into a second home for yourself, then the transaction would not qualify for a 1031 exchange.   Do you plan on reinvesting all the proceeds from the sale into a new business or an investment use property? If yes, or if you plan to reinvest the ...

 Since 1991, IRC § 1031 has required the use of an impartial third party to hold the proceeds from the Relinquished Property sale until the close on the Replacement Property. This third party is known as a qualified intermediary.   Not only does the qualified intermediary hold the funds during the exchange period, but they also help structure the exchange, prepare the exchange documentation, continuously monitor and guide the taxpayer to ensure compliance of the exchange in accordance with Section 1031 at both the state and federal level.   While there are no federal regulations governing qualified intermediaries, with the help of the Federation of Exchange Accommodators (FEA), many states started state-level requirements to uphold high professional standards for qualified intermediaries conducting exchanges in their states. The requirements can vary state to state, but typically include some or all of the following:   ·      ...

  A 1031 exchange, also known as a like-kind exchange or tax deferred exchange, is where real property that is “held for productive use in a trade or business or investment” is sold and the proceeds from the sale are reinvested into a like-kind property intended for business or investment use, allowing the taxpayer, or seller, to defer the capital gains tax and depreciation recapture on the transaction.   The property sold as part of a 1031 exchange is the Relinquished Property. The property purchased is the Replacement Property. The real property in a 1031 exchange must be like-kind; most real estate is like-kind to all other real estate. For example, an office building could be exchanged for a rental duplex, a retail shopping center could be exchanged for farmland, etc.   During a 1031 exchange, neither the taxpayer, nor an agent of the taxpayer, can receive or control the funds from the sale of the property. If a taxpayer has direct or indirect access to the fu...