The 411 on 1031 Exchanges | Part 1

Information has been gathered from sources deemed reliable but not guaranteed and is subject to change without notice. The information contained in this site is provided for informational purposes only, and should not be construed as advice on any subject matter. You should not act or refrain from acting on the basis of any content included in this site without seeking legal or other professional advice.

1031 Exchanges — Deferring Taxes on Real Estate Investments

What is a 1031 Exchange?

Real estate is considered one of the safest ways to invest money, and 1031-Exchanges make it possible to compound gains without paying taxes. This tax method has been in existence for quite some time and is utilized by investors to assist clients in growing their assets.

But how does it work?

Sell property — You sell your property. With luck and planning, your property will have accrued equity since purchase.

Qualified Intermediary — The proceeds from the sale are held by a ‘Qualified Intermediary’. The money may never be in the owner’s possession.

Identify Next Property — To defer taxes, the following property needs to be the same price or higher.

Purchase Property– Using the proceeds from the previous sale (and additional funds, if desired) purchase the subsequent property.

Accrue Equity– Diversify your financial portfolio with strong real estate investments, and watch your net worth grow.

Repeat Process — There is no limit to the amount of times you can defer payment on real property. This is why so many investors utilize real estate as investments.

Rules & Guidelines

There are rules and guidelines that must be followed to stay within the parameters of a 1031 Exchange Real Estate purchase.

Qualified Property — To be eligible as a 1031 Property, it may not be used as a ‘flipped’ property. It must be used for business or investment purposes.

Qualified Intermediary — Typically an attorney, holds the proceeds from the sale of a 1031 property until the next property is purchased.

What are the Timeline Requirements for a 1031 Exchange?

• Timeframe — The replacement property must be identified within 45 days of the sale of the previous property and the replacement property closing must occur within 180 calendar days of the closing (not business days!!).

Amount — The property value amount must be the same or more than the previous property to avoid taxes.

Percentage — The value amount of the new property may not exceed 200% of the previously owned property.

Title Holder — The owner (individual or entity) must remain the same throughout purchases.

Other important questions related to 1031 that we will answer in future blog posts include:

Questions Related to 1031 Exchange

1. What is a 1031 Exchange?
   • Understanding the basic concept and purpose of a 1031 exchange.
2. What Properties Qualify for a 1031 Exchange?
   • Clarifying what types of properties are considered “like-kind.”
3. What are the Timeline Requirements for a 1031 Exchange?
   • Details about the 45-day identification period and the 180-day exchange period.
4. How Do I Identify Replacement Property?
   • Understanding the rules and strategies for identifying eligible replacement properties.
5. Can I Do a 1031 Exchange on a Property Used for Personal Use?
   • Clarifying the usage requirements and restrictions for properties in a 1031 exchange.
6. What are the Tax Implications of a 1031 Exchange?
   • Understanding how capital gains taxes are deferred and impacted by the exchange.
7. Who Can Act as a Qualified Intermediary?
   • Inquiries about the role, requirements, and selection of a qualified intermediary.
8. What Happens If I Don’t Meet the Deadlines?
   • Consequences of failing to adhere to the strict timelines of a 1031 exchange.
9. Can I Exchange Multiple Properties or Partial Interests?
   • Questions about the logistics and rules for exchanging multiple properties or fractional interests.
10. What Are the Costs and Fees Associated with a 1031 Exchange?
    • Understanding the financial implications, including fees and costs, of conducting a 1031 exchange.

Information has been gathered from sources deemed reliable but not guaranteed and is subject to change without notice. The information contained herein is provided for informational purposes only and not to be construed as tax or legal advice. Always seek advice of an attorney for the legal or tax consequences of a transaction and/or related transactions.