Frequently asked questions
Can an exchange include Seller financing?
The answer is Yes. While it s possible to structure an exchange incorporating Seller Financing, it is imperative that the exchanger discuss Seller financing and the posible tax ramifications with the exchanger’s tax advisors before the 1031 is structured to ensure proper structure of the overall 1031 exchange.
Can I close on my replacement property before I have a buyer for my relinquished property?
The answer is Yes. This type of exchange is called a reverse exchange. Reverse exchanges are made a little more complex than a typical delayed exchange because the IRS Code prohibits the exchanger from owning the replacement property and the relinquished property at the same time. As a result, the QI has to hold title to the replacement property until the relinquished property is sold.
Can I exchange my second home?
The answer is Yes. This applies only if your second home qualifies as an investment property.
Can I sell two properties and exchange them into one replacement property?
The answer is Yes. There are two basic rules which are very important. First, the exchange time periods must be strictly adhered to. Both the time for the 45th day and the 180th day deadlines start running from the date the relinquished property closes. Second, If several sales are included in the same exchange, the replacement property identification rules permit listing only three properties of unlimited value or more than three properties whose values comply with the 200% identification rule. As with all 1031 exchange rules, these rules are strict and should be discussed with your tax advisor to assure compliance.
Can I take cash out of a 1031 exchange?
The answer is you cannot take cash out of a 1031 exchange without creating a taxable event. The cash you take out will be taxed subject to all applicable taxes. Due to the strict nature of the I.R.C. tax code governing 1031 exchanges, this and other tax related issues should be discussed with your tax advisor to insure compliance.
Can my personal residence qualify for a 1031 exchange?
The answer is No. Although, Prior to January, 2005, there was no way to avoid paying capital gains taxes with the sale of a highly appreciated primary residence. Revenue Proclamation 2005-14 provides guidance on combining the sale of your primary residence (Section 121) and Section 1031 into a non-taxable sale and exchange of property.
Does an exchange need to be simultaneous?
The answer is No. In fact, today most exchanges are delayed exchanges. Delayed exchanges allow the exchanger to sell the relinquished property first and then allows 45 days from the date of the first Relinquished property sale to identify replacement property and 180 from the close of the first Relinquished property (or until the due date of the exchanger’s federal tax return) to purchase the replacement property. At most the exchanger has a total of 180 days from the sale of the first relinquished property to close on the purchase of the replacement property.
How do I report my exchange to the IRS?
The exchanger needs to complete Form 8824 as part of your annual Federal return. You cannot file your tax return for the year of your exchange until you have completed your exchange. A tax advisor should be consulted to discuss the time restrictions regarding completing your exchange and the due date of your tax return.
What is a Qualified Intermediary?
The 1991 Treasury Rules and Regulations provide guidance on the role of the QI and the documentation they must provide to a 1031 exchange. The QI provides technical experience to maintain the integrity of the exchange. The QI receives the relinquished property from the Exchanger and sells it to the buyer. The QI purchases the replacement property from the seller and transfers it to the Exchanger. A QI can not be a related party, the Exchanger’s employee, attorney, accountant, real estate broker or investment banker within two years preceding transfer of the relinquished property. There is no federal agency that regulates the QI industry. Choose carefully.
What is Boot, Cash Boot and Mortgage Boot?
Boot is receipt or constructive receipt of non-like kind property. It is taxable to the extent there is a capital gain. Cash boot is cash received or constructively received during an exchange or upon completion of an exchange. Mortgage boot occurs when the replacement property has less debt than the relinquished property had and additional cash does not replace the debt deficiency. The Exchanger cannot defer the tax on cash and mortgage boot.
What is “Like Kind” property?
“Like kind” property, that is held for investment can include commercial, single family rental properties, raw land, apartments, industrial properties and a lease hold interest of 30 years or more. If the state in which you reside considers timber and mineral rights real and not personal property, they too are like kind.
When is a 1031 exchange applicable?
Whenever a property owner intends to sell any investment property that is not his personal residence (unless complying with Revenue Proclamation 2005-14) or not property that is held for “sale” with plans to buy another like kind property within 180 days.
Where does the deposit go? Where does the money go?
The contract deposit is held by the Qualified Intermediary (QI). In accordance with the IRC Section 1031 rules, during an exchange an Exchanger may not have construction or actual control over the exchange funds. Therefore, during an exchange the Exchanger must not receives the exchange funds, instead, at settlement the seller’s net proceeds are wired to the QI and placed into a separate interest bearing account. Then the QI wires the funds for the purchase of the Replacement property.
Why exchange property instead of just selling it?
A 1031 exchange allows an investor to defer the payment of capital gains tax on the proceeds of a sale of investment property. This allows an astute investor to use all of the equity from the relinquished property to acquire a replacement property while deferring any applicable sales tax.