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Basic Mechanics of 1031 Exchanges

1031 Exchange Basic Nuts & Bolts

What is a “1031-like kind exchange?” a tool used by investors to defer paying federal income taxes on property sales. Useful IRS Outline.

What does it mean to “defer” taxes?  The investor eventually pays the income tax, but the goal is to pay at a later date when the taxpayer is (hopefully) in a lower tax bracket.   

What are the basic mechanics of a 1031 Exchange? seller parks the proceeds of a property sale (“relinquished property”) with a qualified 1031 agent, then uses the sale proceeds to purchase a property (“acquired property”), and avoids paying the immediate capital gains taxes.   

1031 Exchange Basic Requirements:

  • The property must be “held for investment”.  The sold and the acquired properties must be “productive”, the sale/purchase must be an investment, not property personally used.  
  • Must be “like-kind” properties.  They do not have to be identical, like rental for rental.  For example, vacant land for rental property generally qualifies.  
  • The acquired property must be identified within 45 days of the sale of the relinquished property.  A seller can identify up to 3 properties, and can identify more, but with other limitations.  
  • The acquired property must close within 180 days of the sale of the relinquished property.

Practical things for realtors to think about:

  • The time frames can be tight, especially in a seller’s market.  
  • 2 types of taxes are deferred (everyone forgets about the 2nd, and the 2nd can be the biggie):
    • Capital gains
    • Depreciation recapture
  • The general rule is quick sale fix/flips may not qualify for 1031 exchanges because the “held” duration may be too short.  Realtors should refer their clients to qualified 1031 exchangers on the topic of “held” duration.  
  • An investor can pull money out of a 1031 exchange sale but will pay taxes on that value.  
  • A reverse 1031 exchange is possible; this is where the acquired property closes before the relinquished property sells.  
  • Multiple sales can be wound into one 1031.
  • 1031 exchange qualified intermediaries charge a fee, are usually not the title company, and must be lined up ahead of time.
  • 1031 exchange prop can be converted to personal property if it’s kept as an investment at least 2 years from acquisition.  
  • An investor can make personal use of the property provided the use is not more than 14 days in a 12-month period, or more than 10% of the rented days.
  • The relinquished property and the acquired property must be titled in the same name.  

Three 1031 intermediaries we have worked with successfully:

  • Investment Property Exchange Services, Marie Flavin, 877-230-1031, cell 917-586-5604
  • Sangeeta Banerjee, Esq., 877-494-1031, cell 954-213-1754
  • Old Republic Title, Janet Schaum, 813-849-2816, cell 412-389-5606

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