1031 Exchange FAQ

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Common 1031 Exchange Questions

Do I need a broker for a 1031 exchange?

What happens to a mortgage when you do a 1031 Exchange?

Can you exchange with your own property?

I want to 1031 Exchange land for a "park" model in an RV park for use as a vacation rental. Can I do this?

Can I 1031 Exchange a property that I've owned for less than a year?

How do I determine the taxable gain on a 1031 exchange?

We have explained it many times on this web site but the quickest way is to subtract your Adjusted Basis from your Adjusted Sales Price. This will tell you your Realized Taxable Gain. Next figure out your Depreciation Recapture and add it to 15 percent of your Realized Taxable Gain. This figure will tell you your Capital Gains Tax. Review it yourself, check out our Capital Gains Tax Estimator by clicking here!

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Can you split a 1031 Exchange?

IRS 1031 Exchange is a vehicle tax-payers have used for 20 years to defer their capital gains tax by selling qualified, like-kind  investment or business property. 1031 Exchange have been executed by single and married tax payers, businesses and partnerships, LLC's, Trusts, TIC's and Corporations. In order for there to be an exchange, the name on the title for the property you are selling, should remain the same for the properties you are purchasing. Changing Title or "splitting" the title out, will create issues with the IRS when it comes to determine who conducted the 1031 Exchange. Better to keep the title the same all the way through. If you hold property as a partnership or business, it is also possible to "split" up the partnership with a 1031 Exchange. Depending on how the properties are deeded, partner A can purchase one property as a replacement property, while another partner B can purchase 3 other properties separate from partner A. More information about splitting up a partnership with a 1031 Exchange can be read by clicking here.

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I was told I have to claim my 1031 replacement property the same day I sell my property. Is that right?

If by claim you mean identify your 1031 exchange replacements when you sell your relinquished property, no this is not true. When you sell your property you have 45 days to identify your replacements. You do not have identify your replacements on the same day you sell your property, though some people have done it that way, this is not a necessity.

If by claim you mean purchase your replacements when you sell your property, you don't have to do that either, though some customers have found it advantageous to do so.

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Ok, so I did a 1031 exchange this year. Now what do I do?


Unless you are a tax professional, you should have your return prepared by your tax person. The exchange of 1031 Exchange property is reported on Form 8824, Like-Kind Exchanges. The instructions for the form explain how to report the details of the exchange. The exchange must be reported even though no gain or loss is recognized. (Not to do so could extend your 3-year statute of limitations.) If you have any taxable gain, resulting from the transaction, because you had a partially deferred exchange or otherwise received money or unlike property, it is reported on Form 4797 - Sale of Business Property and Form 1040, Schedule D.Capital Gains and Losses.

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What is 1031 Exchange Real Estate?

1031 Exchange Real Estate is a term used to describe Real Estate that is available for sale as a 1031 Exchange, either as a Relinquished Property or as a Replacement Property. Do not be confused by this term and do not let itsway you from considering a purchase of this type of property. A 1031 Exchange works just like a standard sale, though the seller or buyer may have a few extra rules to follow. If you are searching for 1031 Exchange Real Estate, check out our Exchanger's Clearinghouse and be sure to list your properties. It's FREE and Easy!

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When does the 45 day identification period begin?

Great question and one that often gets confused. Some professionals think that the 45 day identification 1031 Exchange period begins when the QI gets the money. Others think it begins on the date that the documents are signed during the closing. Well, what if it takes a week for the QI to get the money? Or, what if one party signs for a property and the other party signs 4 days later? The correct date for when the 45 day identification period is the date that the sale is recorded with the county, sometimes this is the same day as the closing. Sometimes it is when the QI gets the money. But date you begin your calculation of the 45 days is the date the sale is recorded. This date is also the beginning of the 180 day closing period as well.

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When should I start my 1031 Exchange?

Great question! Like much in life, timing your 1031 Exchange is critical.

The best time to start your 1031 is after you written a purchase and sale agreement with the buyer of your property, determined the property you are selling qualifies for 1031 Exchange and that you will have capital gain which you wish to defer. Soon as you are ready, contact your Qualified Intermediary with the contact information of person or company handling the closing of the sale and your QI should do the rest.

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When my qualified Intermediary holds my funds, how safe are they?

Given todays economic climate, we can think of no better question to ask. You should know that as your 1031 Exchange Qualified Intermediary, Realty Exchangers takes the safety and security of your funds very seriously.

For over 20 years now the safety of client proceeds has been of prime importance to us and here's what we've done about it.

The two most important areas of concern are:

1. The Bank where client funds are deposited.
2. The Qualified Intermediary.

1.) The Bank: Although our bank is considered strong and very well capitalized the only real safety for bank accounts today is "FDIC" (Federal Deposit Insurance Corporation) insurance. Our bank, Riverview Community Bank of Vancouver Washington, has qualified for the FDIC's Transaction Account Guarantee Program and ALL OF REALTY EXCHANGERS ACCOUNTS ARE "FDIC" INSURED. Unlike previous "FDIC" insurance there is no upper limit on the amount.

2.) The Qualified Intermediary: Our company is Licensed, Insured, and Bonded but the only real protection is a QUALIFIED ESCROW AGREEMENT. This is a separate signed agreement between you, us, and the bank, which requires you to approve in writing any withdrawal of your 1031 funds. At the same time it keeps control of the 1031 funds with Realty Exchangers, Inc. thereby meeting the IRS's §1031 requirements (see note below). Unless otherwise requested ALL EXCHANGE ACCOUNTS WILL NOW INCLUDE A QUALIFIED ESCROW AGREEMENT.

Note: The Qualified Escrow Agreement is signed by all parties at the time of closing of the relinquished property. When the 1031 funds are wired into Realty Exchangers account the bank places a hold on the account. Then when the exchanger is ready to close on the replacement property a form is signed by the exchanger (you) that authorizes the bank to release the specified amount to that escrow as requested by Realty Exchangers wiring instructions. Quite simply, the exchanger will have to authorize any use of their 1031 funds.

We want you to feel secure and able to devote your full attention to the structure and completion of your 1031 exchange knowing that your funds will be there when you need them.

Related Info: safe, funds, holds, bank, realty, exchangers, escrow, agreement

I read that I can do a 1031 Exchange without a Qualified Intermediary. Is that possible?

Well, good luck. There are many articles on-line from self-professed 1031 Exchange GURUs who proclaim that you can 1031 Exchange properties without the help of a 1031 Exchange Qualified Intermediary. We ask with so much that can go wrong, is it really worth the risk? If you 1031 Exchange fails, you will be subject to the capital gains tax. The purpose of the Safe Harbor is to prevent Constructive Receipt of your 1031 Exchange proceeds. Your 1031 Exchange Qualified Intermediary IS the preferred method of Safe Harbor.

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How soon can I get my proceeds back after my 1031 Exchange closes?

Your 1031 Exchange Proceeds are available to you at any time. The fact that we are holding your money as your Qualified Intermediary does not mean you cannot have access to it. But in order to take advantage of deferring your Capital Gains tax, there are only a couple of times when you can access your proceeds without danger of collapsing your 1031 Exchange. When you close sale on your Relinquished Property (the property you are selling) you may take back proceeds known as "boot received". These funds may be used however you see fit, just know that they will be subject to Capital Gains Tax. The other time you may access your proceeds without putting your 1031 Exchange in danger is after the sale closes on your final identified replacement property. As with "boot receivable" your remaining unspent proceeds are also subject to the capital gains tax.

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What if no depreciation recapture was taken on my 1031 exchange property?

Depreciation recapture is a factor that must be considered when you determine your capital gains tax and if you are considering an IRS 1031 Exchange. You add it the 15% tax on your Net Realized Gain (Adjusted sales price  minus Adjusted Basis). If you have taken NO depreciation during the time you owned your property, your Depreciation Recapture would be ZERO and you would just use the 15% tax on your Net Realized Gain to determine your Capital Gains Tax. Check it out for yourself on our FREE Capital Gain Tax Estimator, by clicking here.

Related Info: recapture, depreciation, capital, gain, adjusted, gains, realized

How long must rental be held before I can 1031 Exchange it?

Whether you are decided to 1031 Exchange your rental property for something else, OR you want to purchase a rental property with a 1031 Exchange, it is important to figure out and understand if the rental truly is a rental. Of the 4 classifications of Real Estate, the distinction between Real Estate Held of a Business or Trade AND Real Estate Held for sale to customers (dealer property) can be a foggy one. If you are intending to sell a rental property or purchase one you need to show intent of the purchase. If you are selling, you must show that you have collected rents from the property for at least 2 tax periods. If you are buy, the seller must show that they have collected rents for 2 tax periods. Anything less than 2 tax periods could be construed that the intent was to selling the property on the "quick flip". This could change the classification of the rental to a dealer property, much disqualifies it for 1031 Exchange.

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What if i borrow too much on new property in a 1031 exchange and end up with excess cash?

Any excess cash from the proceeds of your 1031 exchange sale are considered boot and subject to capital gains tax in the same year you sold your property. Work closely with your Qualified Intermediary and closing company to ensure that you are taking the correct amount of funds for each replacement property. Preventing this from happening is easy so long as lines of communication between yourself, your closing company and your QI are open and free flowing!

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Can I trade apartments for agricultural ground with like a 1031 Exchange?

Apartments are considered like-kind 1031 Exchange properties. Agricultural ground is considered like-kind 1031 Exchange Properties. Even though these are very different, the chances of a 1031 Exchange of apartments for agricultural ground are very good. Please contact a Qualified Intermediary ASAP to begin the 1031 Exchange process.

Related Info: ground, agricultural, apartments, trade, properties, like-kind, process

Can a partnership interest sell a property at a loss and still get 1031 Exchange treatment?

Partnership interests are specifically excluded as qualified property under 1031 Exchange rules. However, it is possible in many situations to design a transaction to accomplish the goal of an investor to get out of the partnership and still qualify for 1031 treatment Exchange Treatment.

The first thing to examine is the legal status of the investor. For example, tenants in common can split up without dealing with outsiders and get §1031 treatment in the split-up. Under Rev Rul 73-476, the IRS approved this transaction. Three investors owned an undivided interest as a tenant in common. There were no mortgages on the property and the property was held for investment. Each of the three investors exchanged his undivided interest in the three separate parcels for 100% ownership of one parcel.

Sometimes, however, the investors are partners rather than tenants in common. If this is the case, the investors should seek expert legal and tax counsel regarding a tax-free liquidation in kind of the partnership properties to the investors. Then, as tenants in common, they could seek to execute a §1031 exchange.

Caution: This procedure can be risky but if the savings are substantial, it’s worth checking out with counsel.

A very common situation is the single property held by two “partners.” Many joint owners of a rental income property consider themselves as partners when in fact they are tenants in common. In general, a partnership is formed when two or more persons (includes corporations) join together to conduct a business activity with the intent of sharing profits and losses. However, mere co-ownership of real estate maintained and leased or rented is not a partnership unless the co-owners provide services to the tenants other than the normal landlord activities.

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Can you exchange with your own property?

In order for a 1031 Exchange to be completed, there must be an exchange of properties. You cannot 1031 Exchange with yourself.

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I just sold my rental property. Is it too late to turn it into a 1031 Exchange?

Chances are, YES, it is too late to 1031 Exchange a property once that property has already sold, title has changed and you have access to the funds. Careful planning with your tax advisor is paramount. Next time you are planning to sell a business or investment property be sure to discuss it immediately with your tax advisor or contact your friendly 1031 Exchange Qualified Intermediary at 800-570-1031.  The 1031 Exchange rules were written by the IRS and designed to be easy to follow.

It should be noted that if you sell your property and have not yet taken title and haven't had access to the money, it is possible to contact your closing company and reverse your sale before the title changes. Your attorney can be off help in this situation as well.

Related Info: rental, title, access, advisor, planning, closing, money

I want to 1031 exchange a property that I own in Pennsylvania for one in Las Vegas, does this make a difference?

The only issue you should be concerned with when you want to 1031 Exchange Real Estate is if the properties qualify as like-kind with the IRS. Whether you exchange a property in one state with a property from another state does not matter as the section 1031 exchange is an federal action with the IRS. We always recommend that you review your situation with your CPA or tax attorney. These pros are knowledge of the laws in your specific state and city. Sometimes there are rules in various regions that your CPA or attorney can help you with.

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I need to change my identified replacement properties. How do I do that?

The Identification of 1031 Exchange replacement properties can be revoked as long as it is done within the 45-day identification period. This revocation must be done in writing and should include a rescission of a purchase and sale agreement, if one was written. The next step would be to write a new Identification letter that includes the properties you intend to close sale on before the 45 day deadline is reached.

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Are 1031 exchanges exempt from the 3.8% real estate gains (medicare) sales tax that begins in in 2013?

The 3.8% real estate gains sales tax is applicable for real estate transactions where the gain is over $250k. The gain up to and including $250k is not subject to the new tax. This tax is not the same as the capital gains tax where the 1031 Exchange is meant to "defer" your capital gains tax until a different time. If you are conducting a 1031 Exchange and are moving your equity into another 1031 property, your liability would be deferred as there would be no gain to tax.

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How does my mortgage transfer in a 1031 Exchange?

You take on their mortgage and they take yours.

In a 1031 exchange, the assumption of a liability by the other party (or transfer of your property subject to a liability) is treated as boot received by you. It's called mortgage relief. In figuring your net mortgage relief, you may offset against it your assumption of a liability (or transfer of property subject to a liability).

The assumption of a liability or the transfer of a property subject to a liability is treated as boot.

If the other party assumes your liability—or your property transferred subject to the liability—you have received boot. You will be treated as if you received cash in the amount of the liability. The party assuming the liability, or acquiring the property subject to the liability, gives boot.

If you transfer unencumbered real estate in exchange for mortgaged real estate, you have paid boot equal to the amount of the mortgage. The payment of mortgage boot does not result in recognition of gain or loss to the person paying it.

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Do I need to change my purchase and sale agreements to conduct a 1031 exchange?

No. The decision to sell your property as a 1031 exchange is yours alone. Realty Exchangers will supply you with an Assignment of Purchase and Sale Agreement which must be signed by both parties. This agreement stipulates that Realty Exchangers is your Qualified Intermediary and you are assigning us contract rights in your behalf for the property. We will contact your Title/Closing Agent and inform them that we are your Qualified Intermediary and will supply them with the documents necessary to close sale on your property.

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How do I figure out if the property I am trying to sell Qualifies for 1031 Exchange?

Answer: Check out our 1031 Exchange Knowledge Base article regarding the 4 classifications of Real Estate. The IRS sees real estate as 4 classifications, Business Use, Investment, Personal & Primarily held for sale. Real Estate held for Business Use and Investment (usually Land) qualify for 1031 Exchange Treatment. Real Estate held for personal use (such as your home!) and Real Estate that you bought with the intention of "flipping" do not qualify for 1031 Exchange. An easy measure is to ask yourself does this property produce an income? If it does you probably have a good chance of using it for a 1031 Exchange. A discussion with your CPA or tax attorney is best way to determine 1031 Exchange Eligibility.

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When do you figure Fair Market Value on a 1031 Exchange Property?

You would figure the fair market value of Replacement Property at the end of the 45 day 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. However, there are two important exceptions to this rule:

It does not apply to any Replacement Property received by you before the end of the identification period, and
it does not apply to any Replacement Property identified before the end of the identification period and received before the end of the exchange period. However, to qualify for this exception you must receive identified Replacement Property constituting at least95 percentof the aggregate fair market value of all identified Replacement Properties before the end of the exchange period.

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My place of business is also my residence, can I do a 1031 Exchange?

This is what we call a property with two classifications; each classification is subject to a different set of tax rules. The business portion of the property qualifies for 1031 exchange treatment - the personal residence portion does not. However, the personal residence portion of the property qualifies for the Section 121 250K/500K exclusion on the sale of a personal residence.

The allocation of basis values between the business and the residence portions has already been made on the client's tax return when the business property was set up for depreciation and the allocation for interest and real estate tax deductions.

An exchange sounds like your best bet since the entire property would be exchanged - the business portion would qualify for 1031 treatment - and even though the residence portion is a part of the exchange, since it does not qualify for 1031 treatment, it's treated as a sale and qualifies for the Section 121 exclusion. It's like having your cake and eating it too!

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How can I 1031 Exchange a vineyard in Oregon for an apartment complex in Hawaii?

So long as the property you own in Oregon qualifies a like-kind, you may 1031 Exchange it with any other like-kind property in any state, including Hawaii. So the answer to your questions, is YES, you may 1031 Exchange a vineyard in Oregon for an apartment complex in Hawaii, so long as you follow the rules set down by the IRS and use a Qualified Intermediary to act as facilitator of the transaction.

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In a 1031 Exchange, what type of property can farm land be traded for?

All land qualifies for 1031 Exchange as it is classified by the IRS as Real Estate Held for Investment Purposes. Farm Land falls under this category. A 1031 Exchange must be like-kind and according to the IRS Like-kind Real Estate is Real Estate Held for Investment AND Real Estate held for a business or trade. What this means is your Farm land in a rural area is considered like-kind along with an apartment complex downtown. You should realistically trade your farm land for another piece of land or another piece of real estates that is held for business or trade, such as a duplex or rental home. The choice is yours. Happy hunting!

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With a 1031 exchange can you add someone to the title of the new property?

For the purposes of a 1031 Exchange, it is important to keep names on the titles the same for both the relinquished property and replacement properties. This is because in the eyes of the IRS, the entity (a single person, married couple, trust, partnership, whatever) that sold sold the property needs to be the same entity that is purchasing the replacements. When it comes time to prove to the IRS that you actually had a 1031 Exchange, there will be no question if the properties qualified, the timing restrictions were followed and the entities stayed the same. There are exception, such as death, that can be considered. Another topic of conversation for you to have with your CPA or tax advisor.

Related Info: title, properties, entity, restrictions, followed, timing, actually

What if my 1031 Exchange Replacement Property has a mortgage?

A 1031 Exchange for a mortgaged property is common, though there are some issues you should consider:

We all know that mortgages are paid at the time of closing.  Any xcess is treated as "boot paid" which is subject to this rule:

Mortgage boot paid offsets mortgage boot received but does not offset cash or unlike property boot received.

Negative mortgage relief counts as boot paid and adds to the basis of Replacement Property. Knowing how this treatment could affect your exchange is essential in your tax planning.

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What does a 1031 exchange transaction mean in real estate?

When Realtors are talking about someone who is doing a 1031 Exchange or are referring to a 1031 Exchange, they may talk about it as a 1031 Exchange transaction. Often the 1031 Exchange transaction refers to what happens at the closing of sale in that the proceeds are immediately moved from Escrow into a 1031 Exchange Qualified Intermediary's Client Trust Account. There is no difference in terminology between a 1031 Exchange and a 1031 Exchange Transaction, they mean the same thing. Do not be confused by these terms.

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