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1031 Exchange 1031 FAQ's| 1031 Exchange Frequently Asked Questions |
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1031 Basics To defer capital gains tax on the sale of commercial, business, or investment property. Q. How long have 1031 Exchanges been around? Section 1031 has been a part of the Internal Revenue Code since the 1920’s. Q. Are all properties eligible for a 1031 Exchange? No. Your primary residence along with any other property that is not held for commercial, business, or investment purposes are not eligible for a 1031 Exchange. Q. Is a 1031 Exchange right for my situation? There are many variables associated with a 1031 Exchange. Please contact one of our 1031 Exchange Experts today. An independent and professional facilitator who receives the funds from the original sale who holds the funds until they are needed to purchase the new exchange property. The Qualified Intermediary then directly delivers the money to the closing agent for the closing agent who delivers the deed directly to the real estate investor. Q. Is a Qualified Intermediary necessary? Yes. We highly recommend using a licensed and bonded Qualified Intermediary. Please refer to our partners page for a list of trusted Qualified Intermediaries in your area. Q. Can my own attorney or CPA serve as my Qualified Intermediary? No. A Qualified Intermediary must remain completely independent, and cannot have been your agent in any capacity for the past 2 years. No. You have 45 days from the sale of your relinquished property to identify your potential replacement properties. Q. When does the replacement property need to be purchased? 180 days from the sale of the relinquished property the replacement property must be closed upon. Q. What if the 45 day identification period or 180 day closing period is exceeded? The IRS is very strict regarding this subject. There are generally no exceptions set forth by the IRS although exceptions were made after the 9/11 Terrorist Attacks along with recent hurricanes. If you are approaching the end of your 45 identification period please give us a call as we may have a solid solution. • 3-property rule: You may identify up to 3 properties without regard to their value. To completely defer the applicable capital gains tax then the replacement property must be of equal or greater value. If a property of lesser value is purchased then the difference will be taxed. Please contact us should you find yourself in this situation. Q. Do I have to use all the cash proceeds from my sale on my purchase? The replacement property is purchased prior to the selling of the relinquished property. This can be a complex process, so please contact a 1031 Exchange Expert for answers to your questions. Yes. The same entity selling the relinquished property must be the same entity purchasing the replacement property. Q. How long must current property be held in order to qualify for a 1031 Exchange? Property involved in a 1031 Exchange must be held for “investment or productive use in a trade or a business.” When looking at “investment intent” the courts will often look to the period of time over which the property is held. That said, there is no specific holding period requirement for either the relinquished or replacement properties. Taxpayers who hold their relinquished property for two years satisfy the requisite intent for a 1031 Exchange (or two tax reporting periods, since in an audit the IRS may look backwards and forwards two tax returns). A holding period of over a year has generally been accepted, but may be subject to review by the IRS. A much shorter holding period has been accepted, where a change in circumstances indicates that the taxpayer had intended to hold the property for a longer period. The IRS will look at ‘investment intent’ and will call a taxpayer quickly flipping property a ‘dealer’ vs. an ‘investor’. No. Property within the United States and U.S. Virgin Islands must be exchanged for property within the United States and U.S. Virgin Islands. Q. Is a 1031 Exchange tax-free? No. A 1031 Exchange defers taxes; it generally does not eliminate them. The replacement property will carry the tax basis of the relinquished property – which means that upon the sale of the replacement property all tax will be due or the taxpayer can enter into another 1031 Exchange. The capital gains tax could be eliminated if the investor continues to do 1031 Exchanges until death whereas his heirs would then get a step-up in cost basis. The property would then be valued at fair market value at the time of the owners death. Tenancy-In-Common is a form of ownership of real property whereby two or more individuals own an undivided interest in the property, and upon an owner’s death, the interest passes to the owner’s heirs. Interests in Tenancies-In-Common are usually divisible, and can be placed into a 1031 Exchange independently. Q. What is a TIC? A TIC is a type of Tenancy-In-Common that is offered as a replacement property to 1031 exchangers. TIC’s have Sponsors that purchase the property and apply for financing on the property. The properties are generally triple-net with A-rated tenants. TIC's are sold as. The Securities Exchange Commission classifies TIC's as a security. As a security, they can only be sold by a securities broker-dealer, and investors are given special disclosures and protections. Securities TIC's are sold only by the securities broker-dealers and not directly by the Sponsor. TIC’s are generally considered as a possible replacement property by investors that have managed a property (the relinquished property), but are looking for less active management in their replacement property/properties. A TIC investment may also be considered by investors selling raw land who are not looking to take on any property management burden. |