1031 Exchange FAQ

1031 Exchanges expire 180 days after you sell your property. The exception is when you taxes are due. Tax Time Trumps your 180 expiration ... unless you file for the extension. Since you filed for the extension, you should be able to get the full 180 days of your 1031 Exchange period, regardless of whether your taxes have been filed or not. The best best is to check with your CPA or Attorney as we obviously don't know your specific situation and there may be issues that we couldn't know.

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Be very careful not to get caught in a 1031 exchange for services trap. The transfer of Relinquished Property won't qualify for §1031 treatment if it's transferred in exchange for services. This includes all production services. You will need to write up and itemize his services in a separate contract. Be sure to discuss the tax rate for those services with you CPA or tax advisor as there may be actionable tax items here.

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The property sale from five years ago is a closed transaction. To qualify for a 1031 exchange, both your replacement property and your relinquished property must be qualified real estate of like-kind. You sold your property for a cash/note consideration.

Note: You should check to see if your reported the sale on the installment basis of tax accounting. If you did, you might be facing a large capital gain from the payoff.

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You could structure your transaction to qualify for 1031 exchange treatment depending on the cost of the Replacement Property (Office Complex).

You have 3 options when it comes to purchasing your replacement properties;
The 3-Property Rule
The maximum number of replacement properties you may identify is three properties without regard to fair market values of the properties.
The 200 Percent Rule
You may identify any number of properties as long as their total fair market value does not exceed 200 percent of the total fair market value of all Relinquished Properties.

You figure fair market value of Replacement Property as of the end of the identification period. You figure fair market value of Relinquished Properties as of the date you transfer them.

If, as of the end of the identification period, you have identified more properties as replacement properties than permitted, you are treated as if no Replacement Property has been identified.
The 95 Percent Rule
You may identify any number of Replacement Properties if during the Exchange Period you actually received identified Replacement Properties

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Timber is an example of 1031 Exchange like-kind property and may be exchange for other like-kind 1031 exchange property. Review our 1031 Exchange Knowledge Base:

Timberlands differing in quality and quantity of timber.
Timberland, with a reservation of timber cutting rights, for timberland.

Additional reading may be found here http://www.realtyexchangers.com/1031_Exchange_Information_Center/Topic_2_-_Qualified_Property.php#_1Timberlands

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The penalty is that your 1031 Exchange would collapse.  The IRS has said that you have 45 days to identify your replacement properties. Soon as that 45 day deadline is reached, your replacements are "locked-in", which means you cannot change them. The good news is that you do have the option of NOT closing sale on all your identified properties without penalty. But you do have to close on at least one of your identified properties. And remember, any remaining proceeds from your 1031 Exchange are subject to the capital gains tax.

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As you prepare for a 1031 Exchange, you should consider the following:

Do you have a like-kind property?
The property you are selling must be either a property held for investment purposes, such as land OR property held for business purposes, such as a rental.

Will you owe any Capital Gain Tax?
Subtract your Adjusted Basis from your Adjusted Sales Price. If you have a Realized Taxable Gain, you should consider a 1031 Exchange to defer the costs.

When you are ready to hire a Qualified Intermediary (Realty Exchangers), the following information is needed to begin your 1031 Exchange:

Your complete contact information: Name, Address, Phone, Cell, Email.
Your Realtor's complete contact information: Name, Company, Address, Phone, Cell, Fax, Email
Complete Information about the property you are selling (the Relinquished Property): Address, City, State, Zip, Legal Description (if needed)
Complete Closing Company Information: Company, Address, Agent's Name, Address, Fax, Phone, Email. Escrow number assigned to your property.

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Like-kind is one of the most misused terms in real estate exchanging. Be sure not to confuse the term ‘like-kind’ with the term ‘qualified property’. The property must meet both definitions to get §1031 treatment.

The regulations broadly define the term “like-kind.”

“As used in Section 1031(a), the words 'like-kind' have reference to the nature or character of the property, and not to its grade or quality. One kind or class of property may not, under that section, be exchanged for property of a different kind or class. The fact that any real estate involved is improved or unimproved is not material, for that fact relates only to the grade or quality of the property and not to its kind or class. Unproductive real estate held by one other than a dealer for future use or future realization of the increment in value is held for investment and not primarily for sale.”

Real estate located in the 50 United States is of like-kind when exchanged for other real estate located in the 50 United States. The definition of “50 United States” means exactly that. It does not include foreign real estate.

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It all depends on whether you have already identified your 1031 exchange replacement properties. If you already have, then you must wait until your 1031 Exchange Period is over before you should collect your money. If you have not yet identified your replacement properties, then you may have your proceeds back, though these would now be subject to Capital Gains tax.

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Real Estate notes  are always excluded from 1031 Exchange treatment and will not qualify.

Sometimes you have property you want to sell yet some of the items do not qualify for 1031 treatment.

A transfer of that property in an exchange transaction will be treated as a sale of that property.

Section 1031 excludes these assets from nontaxable treatment:

Property you hold for personal use such as your primary residence.
Stock in trade and property held primarily for sale such as inventories and real estate held by dealers.
Stocks, bonds, notes, or other securities or evidences of indebtedness such as accounts receivable.
Partnership interests.
Notes
Choses in action.
Certificates of trust or beneficial interest

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Like-kind is a federal tax term relating to the nature or character of the real estate in the hands of the owner rather than to its grade or quality. The fact that the real estate is improved or unimproved is not material, for that fact relates only to the grade or quality of the property and not to its kind or class.

Qualified real estate located in the 50 United States is of like-kind when it is 1031 Exchanged for other qualified real estate located in the 50 United States and the U.S. Virgin Islands. The definition of "50 United States" means exactly that. Any foreign real estate included in the exchange will be treated as boot paid or received.

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Don't. Do not. Please do not to this type of advice ! Backdating documents in this type of transaction to qualify for a 1031 Exchange benefit you are not entitled to is illegal and treated as fraud by the IRS. Please consult your attorney about the consequences of this action.

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Answer: Believe it or not, this is a very common question. Many people don't realize that the IRS 1031 Exchange is a federal action that can be executed in all 50 states, including the U.S. Virgin Islands. In short, the answer is "yes". For example, if you own land in Maryland and want to purchase land in Texas, a 1031 Exchange is certainly an option if you goal is to defer the capital gains tax on the sale of your property.

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The form to use for reporting your 1031 Exchange to the IRS is the Form 8824. Your CPA or Tax Advisor knows about this form and will be happy to discuss how to fill it out with you. The form is available from the IRS web site at this address. A quick review of this form will help you organize your documents when it is time to file your return.

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Yes. In a 1031 Exchange, the seller's receipt of compensation for granting an option is treated as a nontaxable event. The rule applies if the option money is applied against the sales price of the property. However, option payments do not lose their nontaxable character merely because they are not offset against the purchase price. The transaction stays open until the option is exercised or forfeited.

At that time it is possible to determine how the option money should be treated tax-wise.

If the buyer exercises the option, the option money is considered part of the sales price of the property and treated as a down payment in the year of sale. If the sale is an installment sale, the option money (no matter when it was paid) is treated as payment in the year of sale and part of the contract price.

If the buyer forfeits, and does not exercise the option, it is treated as a sale of the option by the seller on the date the option expired. The option money becomes ordinary income to the seller. The ordinary income rule applies to all sellers including dealers and investors.

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When you dad did his 1031 Exchange last year, did intend to gift it to you? If not there have been court cases that stipulate that you, as an heir, would be subject to Capital Gains, though we cannot anything about any other taxes!

We write write about this on our 1031 Exchange Information Center.

Your intention to eventually give away property you receive in an exchange will not defeat the exchange if the exchange is not a part of the gift transaction. In one case, the gift of a ranch received in an exchange was made to the taxpayer's children 9 months after the exchange. His general desire at the time of exchange was to eventually transfer it to his children and was not, in the court's view, inconsistent with his intent at that time to hold the ranch for productive use in business or for investment. He had no concrete plans to do so at the time of exchange.

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When choosing your 1031 Exchange Replacement Property we use Fair Market value to determine which of the 3 replacement property rules to follow.

Fair Market value is determined by checking similar properties on the market in the same area. This is really when an experience Realtor earns their keep. Realtors have access market information that isn't as readily available to everyone and can give you a good estimate as to the Fair Market Value of your property.

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1031 Exchange rules apply to all US taxpayers. If the offshore company you are asking about  is a US Taxpayer and both the of the 1031 Exchange properties are located within in the fifty states or the US Virgin Islands, and the properties are either investment real estate or business real estate, then the answer is Yes

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A 1031 exchange of assets of a business for the assets of a similar business cannot be treated as exchange of one property for another property. An analysis of each asset involved in the exchange determines if you are engaged in a like-kind exchange for some or all of the assets.

The IRS issued AdvRevRul 89-121 to clarify an older ruling (Rev Rul 85-135) dealing with the transfer of multiple properties in a §1031 exchange. The advance ruling limits the application of §1031 provisions in an exchange of several assets of one business for a single asset of another.

Remember, a 1031 Exchange must be for real property such as land or a rental home. Strict assets do not qualify for 1031 Exchange.

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Most Farms in the US do qualify for IRS 1031 Exchange, however if you live on your land as your primary residence, the home itself does NOT qualify. Since your farm is considered Like-kind you may replace that property any any other like-kind property, including another farm, other parcels of land or any other type of business property, such as an apartment complex, a parking lot or a rental home.

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Though tragic, this does happen. Death and taxes are two facts of life that we all want to avoid. If you die during your 1031 Exchange Period, which is time after your sell your property and before you purchase your last replacement property, there are provisions. Your estate and heirs are giving certain Title Considerations which allow them to complete your 1031 Exchange in the event of your death.

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We are prevented from providing direct tax or legal advice. The answer to your question is probably yes, the un-sold portion of the partnership may qualify for 1031 Exchange.  Make sure the property is deeded as un-divided interest for the remaining shareholders. Just make sure to discuss this in detail with your Tax Advisor or Attorney.

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That's a great question and the answer is the length of your 1031 Exchange depends upon how long it takes to sell your property and purchase your replacements. Once your property is sold you have 45 days to officially declare your replacements. At the same time you also have 180 days from the closing of the property you sold to purchase all of your replacements. Sometimes a complete 1031 Exchange can happen in 24 hours, sometime it takes the full 180 days. It just depends on the nature of the property you are selling and how quickly you can continue your investment with your replacements.

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There is no federal body that regulates 1031 Exchange Qualified Intermediaries. Many of the states are requiring licensing in their state. Washington State requires that 1031 Exchange Qualified Intermediaries are managed by either a CPA or an Attorney. The Federation of Exchange Accommodators is a national organization of Exchange Professionals who have tried to put into place federal guidelines for regulation and education of Exchange professionals. Realty Exchangers, is licensed, bonded and insured in Washington State and a CPA and attorney are officers of the company.

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Depreciation taken or method used on the relinquished property does not carry over to the replacement property in a 1031 Exchange. You figure the substituted basis of the replacement property, allocate the basis between land and depreciable assets and start over following current depreciation rules for the types of depreciable assets you acquire. Your CPA can explain this to you more fully.

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We get this question sometimes from taxpayers seeking to sell their property and purchase another property in the same day. While this undertaking is certainly possible, it can be difficult to accomplish due to the nature of how a 1031 Exchange must be executed. When you sell your property, the funds are transferred to our FDIC insured Client Trust Account via Federal Wire. Then, when your replacement properties are ready to be funded, those funds are transferred again to the seller of the property you are purchasing. Yes, this can happen in one day if the stars align, you are on the right coast (as opposed to the left coast) and you are lucky to have closing companies that can move quickly.  However, this is usually wishful thinking because closing on properties take time, wiring funds takes time, and if you are wishing for same day service, you may be out of luck. Next day service is usually much more practical. Circumventing the Qualified Intermediary to expedite your sale won't work either. Why? Because it's very difficult to have a true Safe Harbor without a QI, though not impossible. Read more about Safe Harbors, by clicking here!

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A 1031 Exchange of a rental property qualifies under the Real Estate Held for Business use provision of the IRS's 1031 Exchange Statue. Whether you live in one the units doesn't matter in terms of qualifying for a 1031 exchange. What is important is that you get help from your CPA or Tax Attorney when writing the Purchase and Sale Agreement with your buyer. A lot of this depends on how your property is deeded. If each unit is deeded separately, this is a no-brainer. If they are all under the same deed, you will need to do some additional wrangling in order to split out the deeds. But, yes, 1031 Exchanging a duplex is possible even if you are living in one of the units. We encourage you to discuss this with your CPA or Attorney for more information.

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In a 1031 exchange you can receive unused proceeds anytime after you have acquired all of the properties identified in your 45-day identification time period. If you do not acquire all of the properties identified in the 45-day identification, then the unused proceeds cannot be released until the earlier of the due date of your tax return including extensions, or 180 days after the closing of the sale of the Relinquished Property. This is meant to protect you from Constructive Receipt of the money, which will cause your 1031 Exchange to collapse and prevent your from deferment of your capital gains tax.

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Of the IRS's 4 classifications of  Real Estate this term can be the most difficult to taxpayers to grasp. The correct term is "real estate held for sale to customers". Our 1031 Exchange Knowledge Base has a very insightful article about this subject. Here is an excerpt that will be very valuable to you.
"This classification is known as dealer property. To be classified dealer property, the property must be held at the time of sale or exchange
primarily for sale
to customers
in the ordinary course of business.
All three elements must exist at the time of sale or exchange or the property will not be classified dealer property. Primarily for sale means of the first importance. It does not have to constitute more than 50% of the purpose—it need only be the most important. The Supreme Court said, “If an owner acquires a property for rental or investment use, but also plans to sell the property and realize gain in any way he can if the original plan becomes unfeasible, he does not hold the property primarily for sale.”
All buyers of real estate are customers as the term is used here. The activity “in the ordinary course of business” must be directly related to the sale of that property. In addition, the activity must be “busy.” The two “busy” activities usually related to sales or exchanges are
1. sales activities related to the property, and,
2.physical improvements to the property.
Many people, including many IRS agents, misunderstand this activity. To be classified dealer property, there must exist a busy business activity directly related to that property. If you buy a parcel of land, subdivide it, and build houses for sale, there's no question you have dealer property. But if you buy a parcel of land, make no physical improvements, subdivide it by getting it rezoned and meeting other legal requirements, and sell it in the form of an unsolicited offer—you get capital gain treatment. The reason? No business activity related to the property. [iii]
If the property is listed with a licensed real estate broker, the sales activities of the real estate broker are not considered to be the sales activities of the owner.
The Tax Court has held the real estate activities of corporations owned or controlled by an individual cannot be attributed to him even though he may be engaged full-time as an officer of the corporation.
Licensed real estate brokers and salespersons ordinarily are not dealers. In Scheuber v. Com. 371 F2nd 996, it was held properties purchased by a licensed real estate broker (who intended ultimately to sell) and held for realization of appreciation in value over a substantial period of time were capital assets.
If dealer property is sold at a gain, the gain is taxed as ordinary income. If dealer property is sold at a loss, the loss is deductible as an ordinary loss."

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We recommend that you insert following clause into your Purchase & Sale agreement. This way all parties know that the transaction will be a 1031 exchange, and there will be no lack of disclosure which may obstruct the transaction. (This is merely a suggestion, and is not required by the "1031" regulations )

"A material part of this transaction is the successful completion of an I.R.S. Code Section 1031 deferred exchange. "Buyer/Seller" agrees to cooperate with the "Exchanger" (note: insert the full name of the party doing the exchange in place of the word "Exchanger") in signing those documents necessary to complete the exchange, provided that "Buyer/Seller" shall incur no additional costs or liabilities in excess of those which would have occurred had this been an outright "purchase/sale," and not an exchange."

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