A 1031 exchange is a process through which you can swap your property for another property (or properties) and avoid capital gains taxes. This process is outlined in Section 1031 of the US Internal Revenue Code.
There are three stages to a 1031 exchange.
Before you relinquish your property, you will need to identify a Qualified Intermediary for your 1031 exchange. You cannot accept payment for the sale yourself, otherwise it counts as a taxable event.
Once you relinquish your property, you're on the clock. Proceeds from the sale must be transferred to your Qualified Intermediary, and you now have 45 days to identify a replacement property (or properties).
Your replacement property must be acquired within 180 days of selling your property.
The IRS does not specify a particular length of time for which you must hold a property before utilizing it in a 1031 exchange. Rather, the IRS will look to your intent in purchasing the property.
A property does not qualify for a 1031 exchange if you are only purchasing the property in order to resell it at a later date. Remember Rule #1: a property must be held for business use, productive use in trade or investment. Resale does not meet that requirement.
While the IRS may consider the length of time you’ve held the property, that is not the sole (or even the most important) factor in determining if a property is eligible for a 1031 exchange.
Generally speaking, no. A primary residence doesn’t qualify for a 1031 exchange. The exception to this is if your primary residence is also utilized as a business.
For example, if part of your home is set aside as a rental property. In this scenario, the portion of your home utilized as a rental is eligible for a 1031 exchange, while the section of your property that is not (your living area) is not.
There is no limit to how many times you can do a 1031 exchange.
The property you’re selling and the property you acquire must be like-kind. In other words, they must both be held for business use, productive use in trade, or investment.
If you’re selling farmland and purchasing an apartment building, that’s perfectly fine as long as both are held for business.
But if you’re selling raw land to a developer in order to help pay for a vacation home, that doesn’t cut it. The properties are not both held for business, trade or investment purposes, so they differ in kind.
To avoid capital gains taxes, the value of your newly acquired property must be equal to or of greater than the value of the property you’re selling.
Let’s say you’re selling property for $100,000, but the new property you’re buying is only worth $90,000. That leaves you with $10,000, which is called the boot. And the boot is subject to capital gains tax (which can be as high as 35%).
Ownership records for both properties must be in the same name. This can be your personal name, or it can be the name of a pass-through entity, such as an LLC or Delaware Statutory Trust.
1031 exchanges can be used for a wide variety of asset types as long as they are like-kind. In fact, you can use a 1031 exchange to acquire multiple properties or even a portion of a larger real estate investment portfolio. 1031 exchanges are one of the most versatile methods of real estate investing.
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No matter how much you have to invest and no matter where you’re at in your 1031 exchange journey, when you work with us, we guarantee that we put you in good hands.
If you have already sold your property as part of a 1031 exchange, you have only 45 days in which to identify qualified replacement properties. Answer a few simple questions and we will connect you with a 1031 exchange advisor who can help you find the right investment for you before you miss your deadline.
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