The ABCs of 1031 Exchanges
All 1031 tax-deferred exchanges include the same essential ingredients but for those completing their first one or haven’t completed one in some time, they can seem a little overwhelming. The advantage of working with an experienced Qualified Intermediary (QI), like 1031 CORP., is their ability to keep the exchange process simple for all parties.
Below are the ABCs of exchanging to keep in mind during your exchange:
- Like-Kind Property: The relinquished and replacement properties must be like-kind. When exchanging real estate, any type of real property qualifies provided it is held for business use or investment. When exchanging personal property assets, both properties must be within the same asset classification system or the same type of property.
- Held for Investment or Use in a Trade or Business: Personal use properties, “flips” and dealer property held for sale do not qualify.
- No Rights to Exchange Proceeds: You cannot have actual or constructive rights to the exchange proceeds which are typically held by the QI. Once funds are deposited into the exchange account, they can only be withdrawn for expenses directly related to the acquisition of the replacement property or at certain times allowed by the regulations.
- 45-Day Identification Period: Replacement property must be formally identified within 45 days of the relinquished property closing. There are rules to be followed but multiple properties may be identified and you do not need a signed contract when identifying replacement properties.
- 180-Day Exchange Period: Replacement property must be acquired within 180 days of the closing of the relinquished property. These deadlines are based on calendar not business days and there are no extensions.
- Equal or Greater Value and Equity: To maximize your tax deferral, you must acquire replacement property that is of equal or greater value and equity than that of the relinquished property. The amount of the trade down in value or equity will be taxable.
- Same Owner Requirement: It is essential that the same taxpayer (owner) owns both the relinquished and replacement property.
- Must use a QI: The Qualified Intermediary (QI) must be an independent party and not your attorney, real estate professional, accountant, close relative, employee or partner. Among other tasks, the QI prepares all exchange documents, coordinates details with the real estate professionals and closing agents, keeps everyone aware of the time lines and holds the exchange proceeds.
- Initiating your 1031 Exchange: An exchange must be set up before the relinquished property is conveyed to the buyer. The transaction can be initiated as late as at the closing table but ideally you will contact 1031 CORP. once you have entered into an agreement with a Buyer.
- Consult your Tax Advisor: Exchanges are an excellent wealth accumulation vehicle but they are not the best strategy in every situation. It is essential to discuss your situation with a tax advisor who can help you decide what is best for you.
The Exchange Team strives to keep the exchange process simple and worry-free for our clients.