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There are a number of rules that real estate investors must follow when performing a 1031 exchange. If these rules are not followed, the sale of an investor’s relinquished property becomes a taxable event, and the investor may needlessly lose 20-35%+ of their capital gain.

Read our Introduction to 1031 Exchange Rules, or dig deeper into the following topics.

Frequently Asked Questions

What is a 1031 exchange?

A “1031 exchange” allows an investor to defer the capital gains taxes that would otherwise be due on the sale of an investment property if an investment property of like kind is acquired under Internal Revenue Code (IRC) section 1031. Specific IRS regulations for 1031 exchanges are laid out in Treasury Regulation section 1.1031.

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What qualifies as "like-kind" property?

In a 1031 exchange, the replacement property must be "like-kind" in order to qualify. For a 1031 exchange, the term like-kind means real estate in general, although there is a distinction between movable (personal) property and immovable (real) property, which cannot be exchanged for each other. 

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What are the 1031 exchange property identification rules?

There are three rules for 1031 exchange property identification. To complete a 1031 exchange, an investor need only comply with one of the three rules:

  1. 3-Property RuleAn investor may identify up to three potential replacement properties, regardless of their total market value, and acquire any or all of them.
  2. 200% Rule. An investor may identify any number of potential replacement properties if their total value does not exceed 200% of the relinquished property’s total value by the end of the identification period. The investor may then acquire any or all of the properties as desired.
  3. 95% Rule. An investor may identify any number potential replacement properties as desired, regardless of their value, if the investor acquires 95% of the total market value of all properties identified.

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What properties qualify for a 1031 exchange?

For a property to qualify for a 1031 exchange, it must be primarily used for investment or productive use in trade or business. To understand how a property qualifies, investors need to understand both intent and predominant use.

Intent indicates that the property owner intends for the property to be used for investment or business/trade. Whether or not a property actually generates revenue is secondary. 

Predominant use indicates that the property is predominantly but not necessarily exclusively used for investment or business/trade. The IRS provides clear guidelines for what is considered predominant use. As long as a property meets the IRS guidelines, it qualifies for 1031 exchange, even if the property is also used for non-business or non-investment purposes. 

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Can I 1031 exchange my primary residence?

No. An investor cannot use their primary residence as part of a 1031 exchange. 

Real estate held for business or investment purposes is considered like-kind. This includes both commercial and residential property. However, personal residences (including second homes and vacation homes) are not eligible for the 1031 exchange. 

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How many properties can you identify in a 1031 exchange?

In a 1031 exchange, the number of properties you can identify for exchange depends upon which property identification rule you intend to follow. An investor need only follow one of the following rules in a 1031 exchange:

  1. 3-Property RuleAn investor may identify up to three potential replacement properties, regardless of their total market value, and acquire any or all of them.
  2. 200% Rule. An investor may identify any number of potential replacement properties if their total value does not exceed 200% of the relinquished property’s total value by the end of the identification period. The investor may then acquire any or all of the properties as desired.
  3. 95% Rule. An investor may identify any number potential replacement properties as desired, regardless of their value, if the investor acquires 95% of the total market value of all properties identified.

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Does a second home qualify for 1031 exchange?

No, a second home does not qualify for a 1031 exchange. While both commercial and residential real estate held for business or investment purposes is generally considered like-kind, this does not extend to primary residences, second homes, or vacation homes. 

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Can I take cash out of my 1031 exchange?

In a 1031 exchange, the total value of the replacement property must be equal to or greater than the total value of the relinquished property to fully avoid capital gains taxes. Any capital that is not reinvested is taxable “boot”, so is subject to capital gains taxes.

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  • 1031 Exchange Basics
  • Property Identification Rules
  • 1031 Exchange Alternatives

The 1031 Exchange: A Simple Introduction

What are the guidelines to qualify for a 1031 exchange? Which properties qualify for a 1031 exchange? Find out that and more here.

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What Do Investors Need to Know About Qualified Intermediaries?

What is the role of the qualified intermediary (QI) in a 1031 exhcange? Why is QI necessary? What should an investor look for in a QI? Find the answers to these questions, and more, here.

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What Should Investors Look for in a Corporate Credit Rating?

Read about corporate credit ratings, credit ratings agencies, and how to use ratings to identify stronger investment property, here.

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Introduction to Depreciation

One of the many benefits of owning real estate is a tax shelter called "depreciation". Investors purchase real property for the stable income it can provide...

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What Are the 1031 Exchange Property Identification Rules?

What is "like-kind" property? How long does an investor have to identify replacement property in a 1031 exchange? What steps must be taken to identify such property? Find the answers to these questions, and more, here.

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Your 1031 Exchange Closing Statement

As the timing on your 1031 exchange becomes imminent, read tax advice and exchange expertise to avoid missing important deadlines and violating IRS guidelines.

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The 721 Exchange, or UPREIT: A Simple Introduction

The 721 Exchange, or UPREIT, allows an investor to exchange ownership in a single asset with units in an operating partnership with multiple assets.

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The 1033 Exchange, or Eminent Domain Reinvestment: A Simple Introduction

A 1033 exchange can be utilized to defer capital gains taxes on the relinquished/lost property in the event of a natural disaster or eminent domain.

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Home Sale Exclusion: Intro to IRC Section 121

The Home Sale Exclusion (IRC 121). What is it? How does it work? Ownership, use requirements, and more here.

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