FAQ

10 Frequently Asked Questions on 1031 Exchanges

• What is a 1031 exchange?
• What are the benefits of exchanging property vs. selling?
• What are the different types of exchanges?
• What are the rules for like-kind exchanges?
• What are the time restrictions on completing a Section 1031 exchange?
• If a person has already signed a contract to sell the relinquished property, is it too late to start a tax-deferred exchange?
• Can the replacement property eventually be converted to the taxpayer’s primary residence or vacation home?
• What is a Qualified Intermediary (QI)?
• What is the function of the Qualified Intermediary?
• Can Related Persons do like-kind exchanges?

What is a 1031 exchange?

Section 1031 of the Internal Revenue Code is the section which provides that no gain or loss is recognized by the Internal Revenue on the exchange of property used for trade, business, or for investment purposes.  The 1031 exchange allows property owners to exchange one or more properties of “like-kind”, while deferring the payment of federal income taxes and some state taxes on the transaction.

What are the benefits of exchanging property vs. selling?

• Section 1031 postpones or potentially eliminates taxes due on the sale of qualifying properties.
• By deferring tax, you have more money available to invest in other properties.
• You can change your investment portfolio by acquiring and disposing of properties without paying taxes on any gain

What are the different types of exchanges?

• Simultaneous Exchange: The exchange of the relinquished property for the replacement property occurs at the same time.
• Deferred Exchange:      This occurs when there is a time lapse between the transfer of the Relinquished Property and the purchasing of the Replacement Property.  This type of exchange is subject to strict time limits.
• Reverse Exchange:  This is a situation where the Replacement Property is purchased prior to transferring the Relinquished Property.
• Personal Property: Is the exchange of like-kind or like-class personal property.

What are the rules for like-kind exchanges?

• Both properties must be held for use in a trade or business or for investment purposes.  Property used primarily for personal use (primary residence or vacation homes) does not qualify for like-kind exchanges.
• The Value of the replacement property must be equal or greater than the value of the relinquished property.
• The equity in the replacement property must be equal to or greater than the equity in the relinquished property.
• The debt on the replacement property must be greater than the debt on the relinquished property.
• All of the net proceeds from the sale of the relinquished property must be used to acquire the replacement property.
• Property that is owned outside of the United States cannot be exchanged with property inside the United States.

What are the time restrictions on completing a Section 1031 exchange?

You have forty-five (45) days after the date that the relinquished property is transferred to identify replacement properties.  One hundred and eighty days (180) after the transfer of the relinquished property the exchange must be completed, or by the due date of the taxpayer’s federal tax return for the year in which the relinquished property was transferred, whichever is earlier.

If a person has already signed a contract to sell the relinquished property, is it too late to start a tax-deferred exchange?

No, as long as the relinquished properties benefits and burdens, or title, has not been transferred a tax-deferred exchange can still be done.

Can the replacement property eventually be converted to the taxpayer’s primary residence or vacation home?

Yes it can after a holding period and as long as the requirements of Section 1031 were met prior to changing the primary use of the property.

What is a Qualified Intermediary (QI)?

A Qualified Intermediary is an independent party who, in accordance with a written agreement with the taxpayer, facilitates the tax-deferred exchanges pursuant to Section 1031 of the Internal Revenue Code.

What is the function of the Qualified Intermediary?

• The QI acquires the relinquished property and transfers it to the buyer.
• The QI holds the sales proceeds
• The QI acquires the replacement property and transfers it to the taxpayer to complete the exchange within the time limit.

Can Related Persons do like-kind exchanges?

Special rules apply to like-kind exchanges between related persons.  If either person disposes of the property within two years after the exchange, the exchange is disqualified from non-recognition treatment.  Related persons under these rules include you and a member of your family (spouse, brother, sister, parent, child, etc.)