Note: Many of the following situations are subject to varied interpretations and/or require more detailed information.
What is a 1031 Exchange?
2: What is "like-kind"?
3: What are the time limits?
4: How do I Identify a replacement property?
5: Can I get an extension?
6: Can I use the proceeds for anything other than my property?
7: How do I begin a 1031?
8: Can I purchase my replacement property before I sell my relinquished property?
9: How do I calculate my gain or savings?
10: What if I live in part of the property?
11: What happens if I buy down in value?
12: Can I exchange my vacation home?
13: I'm dissolving a partnership, how does that affect the exchange?
14: Why does it matter that I've married since I bought the property I'm selling?
15: Can I exchange timber or water rights?
16: Is a Qualified Intermediary needed if all properties are closing concurrently?
17: What happens if I forgot to put a cooperation clause into my sales contract?
18: Why can't my real estate agent act as a Qualified Intermediary?
19: Can I borrow against the funds held by the Qualified Intermediary?
20: Can I take money out of the exchange?
21: When can I obtain my money if I choose not to exchange?
22: Can I receive the interest on the funds while held?
23: Can the Qualified Intermediary advance funds from the exchange for the fees
and costs needed to acquire the replacement property?
24: I've been asked to carry a loan for my buyer, how does that affect the exchange?
25: Can I improve property I already own?
26: How many properties can I buy or sell in one exchange?
A 1031 Exchange is a means of deferring capital gains taxes when selling investment property and purchasing like-kind investment property.
With real property, like-kind means investment property for investment property. You can exchange an apartment complex for vacant land. The replacement property does not have to be income producing, but it must be held for investment purposes. Personal property exchanges must be "similar-in-use." A plane must be exchanged for a plane, veterinary equipment for veterinary equipment. See our page on Oil & Gas as like-kind property.
From the close of escrow on your relinquished property, you have 45 days to identify (with your accommodator) your replacement property and thereafter, 180 days OR the date the tax return is due (including extensions) for the tax year in which the Relinquished Property is transferred, whichever is earlier. These time periods run concurrently. In no event can these deadlines be extended. You have the right to request extensions for filing as usual, so long as the extension does not exceed 180 days from the close of escrow.
You will need to submit, in writing, your selections of replacement properties. You can identify up to three properties (without regard to value) or as many properties you would like (as long as the aggregate value of all properties identified does not exceed 200% of your relinquished property). The 95% Exception: Automatically used if neither of the above rules apply. Simply stated, the exchanger must acquire 95% of what was identified! This certainly keeps people from identifying entire blocks of potential properties!
Unfortunately the IRS will not issue an extension to the 45-day rule or the 180-day rule. However, if you are within your exchange period and your tax returns are due, you can file for an extension for your tax returns to receive the full 180 days allowed to complete your exchange.
Any funds used for anything other than to purchase a new investment replacement property will be taxable and if taken from the exchange, or escrow, during your exchange period could jeopardize the integrity of your entire exchange.
Call a qualified company to begin the process. (Or you can submit your request online by clicking here.) We will ask you to fax the Contract or Escrow Instructions and Title Report/Commitment. Once those documents are received, we will process your Exchange and have your papers delivered within 24 hours.
This is called a reverse exchange.It is best to call for more information due to the complexity of the transaction.
the price you paid for your property, subtract any depreciation, add any capital
improvements. This figure is your adjusted basis. Subtract the adjusted basis
and the new costs of sale from the new sales price and the remaining figure is
your gain. Expect to pay 20% of that to the Federal Government, plus applicable
state sales taxes, if you do not exchange!
Use our Calculator
You can exchange a portion of your property if it has been held for investment purposes. Frequently a farm or ranch falls into this category. A multi-family property might also be part residential and part investment property.
If you go down in value, you can still do an exchange to defer a portion of your transaction; however, you will pay taxes on any funds you receive upon completion of the exchange. Closing costs may also offset the price differential. You may wish to acquire more than one property!
Vacation homes fall under very strict guidelines to determine if they are actually investment property. If you've rented the property out while you owned it, it may qualify for tax deferral. In addition, if you have not personally used the property, you might be able to convince the IRS it was purely held for investment.
The same entity that relinquishes the property must acquire property to qualify for an exchange. If some of the partners simply want cash and do not intend to exchange, they can be cashed out when the sale closes and the partnership can remain intact and acquire property. However, if various partners want to go their separate ways but still want to exchange, then the only real option is for the partnership to deed the appropriate percentages to the various partners, before the sale closes. There is a risk in this, however, in that Section 1031 is for property HELD for productive use in business, trade or for investment purposes. If the partnership deeds to the individual partners, has the property been "held" by the individuals? The IRS has not defined what constitutes "held"!
If you sell a property that you own solely, and your spouse does not have an interest in the old property but does acquire new property with you, the IRS could give you credit for only one-half of the purchase! Depending on the values of the properties involved and whether or not you live in a community property state this could result in a significant tax bill!
Q: Is a Qualified Intermediary needed if all properties are closing concurrently?
Yes, if there are more than two properties involved. If two exchangers want each others' properties, a Qualified Intermediary is not required. If three or more properties are involved, someone has to either go through the chain of title to make the exchange work or utilize a Qualified Intermediary to prepare the documents required by the IRS to show the trade.
The cooperation clause is designed to clearly show the exchanger's intent to exchange. It is possible to accomplish the exchange by adding this statement after the initial acceptance of the offer, before the sale closes. Another way to accomplish this is to simply have the buyer sign the Assignment o the Purchase Contract prepared by the Qualified Intermediary (which is the extent of the cooperation required.) Certainly, for negotiation purposes, it's best to get an agreement to cooperate early in the transaction.
Any agent of the exchanger's is disqualified by the IRS to act as a Qualified Intermediary as well as any related party. If in doubt about whether or not someone is an agent or related party, if there is a relationship by contract or blood, there is probably a relationship that could disqualify the exchange. With Intermediary fees so reasonable, there is no need to risk the possible tax consequences.
Borrowing or pledging the funds would represent the Exchanger's control of the money, which would make it taxable and would disqualify the exchange.
The exchanger may receive funds at the close of the sale escrow (prior to the funds going to the Qualified Intermediary) by instructing escrow accordingly. No funds can be disbursed to the exchanger while held by the Qualified Intermediary.
Q: When can I obtain my money if I choose not to exchange?
In order to qualify for an exchange, the exchanger's access to the funds MUST be restricted by the Qualified Intermediary. IRS Code # 1031 clearly states the exchanger may receive the exchange funds if (1) he fails to identify within 45 days, he may receive the funds on the 46th day, or (2) if he fails to acquire the property, he may receive his funds on the 181st day. There may be some leeway if the exchanger is unable to acquire property identified due to a material fact beyond the exchanger's control. However, this would need to be determined on a case-by-case basis. Of course, if the exchanger acquires one property and has money remaining, those funds will be returned after notification to the Qualified Intermediary that there are no other properties to be acquired and the exchange is complete.
Q: Can I receive the interest on the funds while held?
Any interest earned by the exchanger can only be disbursed upon completion of the exchange. Otherwise the exchanger would be benefiting from the funds which would constitute a "constructive receipt" of the funds and be taxable. The Qualified Intermediary will issue a 1099 statement for the tax year during which the interest was actually paid to the exchanger.
Funds can be disbursed to escrow for earnest money or common expenses such as appraisals and credit reports when the Qualified Intermediary has been assigned into the transaction in place of the exchanger. Funds must be requested by escrow (not the exchanger) to avoid the issue of the exchanger's control of the funds. If the exchanger advances any of these funds they can be reimbursed at the close of the escrow without triggering any taxes.
A seller carry-back can be treated as an installment sale or may be deferrable upon certain conditions (call us for an in-depth review). The important thing to remember is that the method of handling a carry-back will have important tax ramifications to the exchanger and the options must be discussed and an action determined BEFORE THE SALE CLOSES.
You cannot trade real property for improvements as they are not like-kind. Also, if you own both properties at the same time there can be no trade. Though there have been some recent encouraging court cases, if at all possible, do not acquire the replacement property until the improvements have been made. There are ways to make the improvements tax deductible via a "build-to-suit" or "workout" exchange--call us for details and a review of your particular situation.
Buy as many as you can afford and can close within the same time period. Sell as many as you can provided they can all close within the time period set by the closing of the first sale.
All information on this site is intended to be accurate, complete and timely; however, TPG does not warrant the accuracy of the information contained herein nor is it responsible for any errors or omissions and assumes no liability for its use. While some information on this site may be about legal and/or tax issues, it is not legal advice, please consult a professional.