1031 Exchange FAQ - BUYER

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Common 1031 Exchange Questions

Before I 1031 Exchange a property, can I borrow against it?

Can I 1031 Exchange my lease option home?

What property does not qualify for 1031 Exchange?

The guy building my 1031 Exchange property wants to include his paving services as part of the exchange. Will that work?

How do I 1031 Exchange a duplex when I live in one of the units?

In a 1031 Exchange, do I adjust the sales price to a buyer who gave me 'option money'?

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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My 1031 Exchange has an option contract with the buyer. How does this work?

In a 1031 Exchange,  gain or loss from of an option contract is considered gain or loss from the exchange of property. The option contract takes on the same classification as the property (to which it relates) would have if acquired by the optionee buyer.

Here's how it works for the 4 classifications of real estate:

Business Property —If the underlying property would have been business property in the hands of the optionee, the gain or loss is subject to §1231 treatment. To qualify, the option must have been held for more than one year. Under Section 1231, gain is treated as long-term capital gain. Loss is treated as ordinary loss. If the holding period of the option is one year or less, gain is treated as ordinary income. Loss is treated as ordinary loss.

Investment Property —If the underlying property would have been investment property in the hands of the optionee, capital gain or loss is realized. If the option was “held” for more than one year, the capital loss is long-term. If one year or less, short-term.

Personal Use Property—If the underlying property would have been real estate held for personal use in the hands of the optionee, gain is treated as capital gain. If a loss is suffered, it is personal and not deductible.

Dealer Property—If the underlying property would have been real estate held as property for sale to customers in the ordinary course of his trade or business by the optionee, any gain is treated as ordinary income. Any loss is treated as a deductible ordinary loss.

Related Info: work, buyer, contract, option, loss, gain, treated, ordinary, optionee


Can I 1031 Exchange a note that I have been holding for 5 years now that the buyer has paid it off?



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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Can I 1031 Exchange a note that I have been holding now that the buyer has paid it off?



The property sale 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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The buyer of my 1031 Exchange property wants to pay me in regular installments. Can I do this?

We have a complete section devoted to 1031 Exchange and Installment notes in our 1031 Exchange Knowledge Base, just click here.

Both 1031 exchange and installment rules apply. First, 1031 will limit the recognized gain to the fair market value of the net boot received. (This is a mandatory rule—not elective.) After the recognized gain is figured under 1031, the installment rules under IRS Section 453 are applied. Installment sale rules are elective—you may elect-out if you desire.

Your installment sale Contract Price does not include the fair market value of the like-kind property you receive in the exchange. Therefore, like-kind property you receive in the exchange is not treated as payment received.

Your installment sale Gross Profit (recognized gain) is reduced by gain not recognized in the exchange.

Caution : Using the installment method of tax reporting is elective—not mandatory. It’s your choice. You can recognize all the gain in the year of the exchange if you want depending on your other income and losses during the year of the exchange. For example, if you had large capital losses during the year, you might elect to recognize the entire gain and offset it against the capital losses. Your call.

Related Info: installments, regular, wants, buyer, installment, gain, recognized, rules, losses, market


The buyer of my 1031 Exchange property wants to pay me in Installments. Can I do this?

We have a complete section devoted to 1031 Exchange and Installment notes in our 1031 Exchange Knowledge Base, just click here.

Both 1031 exchange and installment rules apply. First, 1031 will limit the recognized gain to the fair market value of the net boot received. (This is a mandatory rule—not elective.) After the recognized gain is figured under 1031, the installment rules under IRS Section 453 are applied. Installment sale rules are elective—you may elect-out if you desire.

Your installment sale Contract Price does not include the fair market value of the like-kind property you receive in the exchange. Therefore, like-kind property you receive in the exchange is not treated as payment received.

Your installment sale Gross Profit (recognized gain) is reduced by gain not recognized in the exchange.

Caution : Using the installment method of tax reporting is elective—not mandatory. It’s your choice. You can recognize all the gain in the year of the exchange if you want depending on your other income and losses during the year of the exchange. For example, if you had large capital losses during the year, you might elect to recognize the entire gain and offset it against the capital losses. Your call.

Related Info: installments, wants, buyer, installment, gain, recognized, rules, losses, market


What is an Earnest Money Clause?

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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How do I 1031 Exchange a duplex when I live in one of the units?

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.

Related Info: units, live, duplex, deeded, attorney, discuss, deed, additional


How do I do a 1031 Exchange?

We've been reading countless daily internet articles explaining the benefits and the whys of an IRS 1031 Exchange. The reasons why someone should do a 1031 Exchange are quite simple, the taxpayer wants to defer their capital gains tax. But what about how? How do you do a 1031 Exchange?

1. Own Qualified Real Estate.

Make sure you have real estate that qualifies for 1031 Exchange. Make sure you or your business owns either investment real estate, such as land. Or, real estate held for business use, such as a rental property or an office complex. Careful consideration of your property must be taken into account. Do not be fooled by individuals telling you you can 1031 Exchange your primary residence or property you purchased yesterday with the intent to flip tomorrow. This is a horrible trap. Consult your CPA for more information.

2. Find a buyer

Realty Exchangers has two very popular venues for finding buyers of your property and finding 1031 Exchange pros who know how to make all happen. Visit our 1031 Exchange Property Search Engine to find looking at http://www.exchangersclearinghouse.com. You can also look up a local professional with our 1031 Exchange Pro Directory located at http://www.realtyexchangers.com/1031_Exchange/index.html. Both of these services are free!

3. Accept the and write up a purchase and sale agreement.

Work with your buyer and attorney to make sure all parties are happy with the offer and that all contingencies are considered. Be sure to inform the buyer that this is a 1031 Exchange.

4. Contact a closing company.

Finding the right closing/title company can be a chore. Your attorney or real estate agent may have some ideas of which closing company to use, better to find one that knows how to handle 1031 Exchanges.

5. Setup a 1031 Exchange with a Qualified Intermediary. (QI)

Choosing your 1031 Exchange QI is important. You need one with experience and integrity. Realty Exchangers has been providing 1031 Exchange QI services since 1989. In over 20 years, we helped thousands of tax payers defer their capital gains tax. We are the experts at making the transaction simple and easy.

6. Close sale on your property and transfer your proceeds into your QI's trust.

When you sale closes, you closing company is directed to transfer the proceeds from your 1031 exchange into your QI's trust account. Here the funds will sit while you search for your 1031 Exchange Replacement Property.

7. Know your 45 day and 180 day deadlines.

Soon as the sale closes on your Relinquished Property the clock starts ticking on securing qualified Replacement Properties.

45 day Identification Period. The IRS stipulates that you have 45 days to officially "Identify" your replacement properties. This must be done in writing and Realty Exchangers provides you with the forms necessary.
180 Closing Deadline. The IRS also stipulates that you have 180 to close sale on ALL of your identified replacement properties.

8. Identify your Replacement Properties.

Use the same web site tools mentioned in number 2 above. These must be of like-kind, meaning they must follow the same qualifications test as mention in step 1. The number of Replacement Properties you can chose, depends on which rules you want to follow. The 3 property rule, the 200% rule or the 95% rule. The most popular is the 3 property rule because it is the easiest for most people to understand.

9. Close on your Replacement Properties.

Essentially, this step is the same as steps 3 and 4, mentioned above.

That is all there is to it.

Realty Exchangers takes pride in keeping this process as clean and simple as possible. Only when you attempt to circumvent the above steps do you invite trouble with your 1031 Exchange. You have two options with the IRS. Pass or Fail. If you follow the rules, your Exchange will pass and you will defer your capital gains. Failure to follow the rules or attempts to circumvent the process creates issues that can force your Exchange to collapse.

And always, if  you have questions, the best option is to call Realty Exchangers at 800-570-1031.

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Can I 1031 Exchange vacant land that I intend to sell later on?

Vacant land can qualify as real estate held for investment at the time of the 1031 exchange even though you might sell it two years later. Of course, you might not. That's why land held for investment but with the possibility of developing it or selling it years later is treated as land held for investment until when and if something happens to change its classification. However, one taxpayer acquired real estate and immediately sold a two-year option to sell it to a prospective buyer. IRS said no exchange because the land was held for sale right at the start. You need to be very careful with any property that you intend to sell right away. Intent to sell a property quickly can get that property classified as Dealer property which does not qualify for IRS 1031 exchange.

Related Info: later, intend, land, vacant, investment, years, estate, qualify


When Does a 1031 Exchange Sale Take Place?

The timing of the sale is a key factor. Gain or loss to the seller is not realized until the transaction has been closed. In a 1031 exchange transaction, the Identification or the Exchange Time Periods do not start to run until the transaction has been closed. In some instances, the sale might be held to have happened on an earlier date than the taxpayer believed. This could be fatal to a 1031 exchange since the Time Periods would be expired. That's why it's important to understand the rules determining "date of sale".



A sale is considered closed on the day the buyer's right to receive the property is unqualifiedly established. This usually takes place upon delivery of the deed even though actual possession by the buyer may take place later. However, it is not necessary for title to pass for a sale to take place taxwise.

For tax purposes, a closed transaction also results from a contract of sale, which is absolute and unconditional on the part of the seller to deliver a deed to the buyer upon payment of the consideration, and the buyer has the right to secure possession and to exercise all the rights of ownership.

Here is the IRS position: A sale occurs when the deed passes or when the buyer has the right of possession and the economic burdens and benefits of ownership are transferred to the buyer - whichever occurs first.

Here is an illustration of how this rule caught an unsuspecting taxpayer right in the wallet. The Awalts lost the tax-free rollover on the sale of their old house because more than 2 years went by before they bought their replacement residence. [Caution: This 2-year rollover rule has now been repealed.] Here's what happened.

The Court did not accept Awalt's contention that the sale of their old residence took place on the later date - day the legal title was transferred. The Court held the actual sale took place at an earlier date - the day the burdens and benefits of ownership shifted to the buyers. This took place on the day the agreement of sale was executed. Since this earlier date was more than 2 years before the Awalts bought their replacement residence, the tax-free exchange benefits of Section 1034 were denied them.

An agreement to sell is not a sale even if part payment is made in cash at the time the agreement is signed.

Related Info: sale, buyer, date, transaction, closed, possession


Can land that is held in an irrevocable trust qualify for a 1031 exchange?

Even if the buyer's money would be put into a trust and the trustees would assume the trusteeship of the other's trust and the beneficiaries of each trust would be swapped. There is not much we can do for you with a 1031 Exchange. The biggest problem with trusts, is that they get involved in so many legal issues. And since there are so many different kinds of trusts, with so many unique variations, it is very difficult to answer you question without knowing all of the details of your particular case. Since we are barred from providing legal advice, we recommend you discuss this with your attorney or the trust's attorney.

Related Info: qualify, irrevocable, land, attorney, trusts, legal, particular, knowing, difficult


Soon as I buy my 1031 Exchange Replacement Property, how long do I have to hold it before I can 1031 exchange it again?

The IRS code and 1031 exchange regulations are silent on the issue of time held. You must be able to show and take the position that the decision to exchange after your acquisition was not related to or a contingent part of the original acquisition. In other words, if there is any written evidence what-so-ever such as agreements, deposits or any other record showing intent to exchange the property once acquired, the proposed exchange of the property is dead - there is no way to qualify property acquired for resale.

To help, here is an excerpt from our 1031 exchange book. Notice in the example, the taxpayer attempted to qualify the property by holding it for a period of time as rental income property. The option was fatal to the exchange since it recorded the taxpayer's mind and intent at the time of the exchange. Even though the circumstances are somewhat different, the same rules still apply.

The step transaction doctrine embodies a general requirement that all steps, which are an integral part of the exchange, will be considered in determining the proper tax treatment for the exchange. The step doctrine may be applied by the IRS if

there was a pre-existing binding commitment to take each of the steps at the time the transaction was commenced, and
the steps were functionally interdependent in the sense the earlier step would have been unproductive without the later steps.

The step transaction doctrine may also apply if all the steps, although functionally independent, were contemplated at the outset of the 1031 exchange.

Example: You find a choice apartment house property for sale. You know of a buyer who would be willing to pay top dollar for the property. You decide to acquire the property and sell the buyer a two-year option to buy the property. In the meantime you will operate it as a rental income property. You currently own a commercial property you want to sell now but your accountant advises you need another capital gain this year like you need a hole in your head.

You enter into an exchange agreement to sell your commercial property and acquire the choice apartment house with the plan of selling the option, operating the property until the option is exercised, and taking your total gain in that taxable year.

The exchange will be disallowed and treated as a sale. Not only does the step transaction doctrine apply and collapse the exchange but also the act of selling the option at time of acquisition reclassifies the rental property as real estate held for sale in the ordinary course of business.

Related Info: replacement, time, option, steps, doctrine, transaction, sale


How do I write a "Cooperation Clause" for the 1031 Exchange property I am selling?

Here is a "cooperation clause" that you can have added to the purchase and sale agreement for the sale of your 1031 Exchange Relinquished Property.

buyer hereby acknowledges it is the intention of Sellers to complete a deferred exchange and qualify for treatment under Internal Revenue Code Section 1031. This exchange will not delay the closing (of escrow) or cause additional expense to buyer. Seller's rights and obligations under this agreement may be assigned to a Qualified Intermediary (as defined in IRS Regulation 1.1031(k)-1) of Seller's choice for the purpose of completing the exchange. buyer agrees to cooperate with Seller and the Qualified Intermediary in a manner necessary to complete this exchange.

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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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Before I 1031 Exchange a property, can I borrow against it?

An interesting concept, this is called anticipatory mortgaging and has some benefits for a 1031 Exchange. What if you were to refinance your Relinquished Property prior to the exchange to get cash and then raise the mortgage to be assumed or paid off by the buyer? Remember these things:

Borrowing money on your property is not a taxable event so it won't affect your 1031 Exchange.
The higher mortgage increases the amount of mortgage boot received that qualifies for offsetting against mortgage boot paid.

Let's say Davis wants to exchange Cloverleaf Apartments for Sunshine Apartments owned by Roberts. The terms of his exchange include:

Davis assumes a mortgage of $274,000 on the property he acquires in the exchange.
Davis has a mortgage on Cloverleaf of  $100,000 that will be assumed by Roberts.
Based on the market values of the properties, Davis receives cash boot in the amount $200,000 to balance the equities.
When the exchange is closed, Davis receives taxable boot in the amount of $200,000 making him very unhappy.
Here’s how his taxable boot is figured following the offset rules of 1031:
Mortgage on Cloverleaf Property relinquished was $100,000 (mortgage boot received)
Deduct mortgage on Brentwood assumed by Jones - $274,000 (mortgage boot paid)
This results in a negative offset - $174,000
However, under the rules, mortgage offset cannot be less than zero. Davis gets no boot offset from the difference of $174,000 to offset his cash boot received of $200,000. The result is Davis gets hammered for a $200,000 taxable gain.

Experienced 1031 exchangers are quick to recognize transactions where negative boot relief can result in more gain being recognized from net boot received. In our example, Davis should consider borrowing on his Relinquished Property (Cloverleaf) prior to and outside the exchange transaction. If he refinanced and took out $175,000 cash (non-taxable), his boot would be figured like this:

Davis assumes a mortgage of $274,000 on the property he acquires in the exchange.
Davis has a mortgage on Cloverleaf of  $275,000 that will be assumed by Roberts.
To balance the equities, Davis receives cash boot in the amount $25,000.
When the exchange is closed, Davis receives taxable boot in the amount of only $26,000 making him very happy. Here’s how the taxable boot for this exchange is figured following the offset rules of 1031:
Mortgage on Cloverleaf Property relinquished was $275,000
Deduct mortgage on Sunshine assumed by Davis - $274,000
Difference – Mortgage relief boot received by Davis is $1,000
Add Cash boot received of $25,000
Total boot received by Davis is $26,000
By refinancing outside the exchange, Davis reduces his gain $200,000 to only $26,000.

Exchangers should seriously consider some financing moves outside the exchange to reduce the negative boot relief to zero if possible. Even though equities would not change, the amount of taxable boot could be substantially reduced. This can be accomplished but only with very careful and knowledgeable planning. You don’t want any financing moves treated by the IRS as part of the exchange transaction.

If the refinancing can be demonstrated to be unrelated to the exchange of the Relinquished Property, the proceeds of the refinancing will not be characterized as boot.

The IRS issued a Proposed Regulation making such mortgage proceeds taxable but it was not adopted.

Replacement Property may be refinanced after the exchange is closed and the proceeds used by the owner for any purpose. This is a non-taxable event. However, to qualify, the refinancing must not be connected to the exchange transaction such as a contingency for the exchange to close. The exchange agreement and closing statements should be silent regarding the refinancing.

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How do I write a "Cooperation Clause" for the 1031 Exchange property I am buying?

When you are ready to purchase your 1031 Exchange Replacement properties you can use the following cooperation clause in your purchase and sale agreements.

"Seller hereby acknowledges it is the intention of buyer to complete a deferred exchange and qualify for treatment under Internal Revenue Code Section 1031. This exchange will not delay the closing (of escrow) or cause additional expense to Seller. buyer's rights and obligations under this agreement may be assigned to a Qualified Intermediary (as defined in IRS Regulation 1.1031(k)-1) of buyer's choice for the purpose of completing the exchange. Seller agrees to cooperate with buyer and the Qualified Intermediary in a manner necessary to complete this exchange."

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Can I 1031 Exchange a rental home with my sister?

Yes, you can, as exchanging with a related party is OK - but to qualify for a 1031 Exchange, you should understand exactly what an exchange with a related party really means and the rules for making it work.

You have two kinds of exchanges involving related parties available to you. One is a direct swap between related parties. The other is an exchange involving a sale of the Relinquished Property and the acquisition of a related parties property.

Direct swaps may qualify for a 1031 but a special 2-year rule applies that could result in triggering the gain when you least expect it. This rule affects all like-kind exchanges between related parties including reverse exchanges. Under this rule if you or the related party disposes of the property within 2 years after the exchange, the exchange is disqualified and gain or loss will be recognized for both you and the related party as of the original date of the exchange.

Some of these exchanges are not subject to this rule.

You are the owner of a property you want to sell. Your daughter owns the property you wish to acquire. She is not interested in your property but is willing to sell her property. You find a buyer for your property (Relinquished Property) but before closing the transaction enter into an exchange agreement with your Qualified Intermediary. As part of the exchange, you purchase your daughter’s property as your Replacement Property. Since you are the only party qualifying for §1031 exchange treatment, the exchange is not subject to the 2-year rule. Daughter has a taxable sale.

As always discuss this with you tax preparer for the best course of action.

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I want to 1031 Exchange a land lot I just bought. My friend thinks it's dealer property. Is that true?

Excellent question and worthy of review! Most land is considered property that is held for investment and almost always passes the 1031 Exchange qualification test with the IRS. Does this land also have a house on it that you are living in? This could create a mixed classification scenario, check out our page on mixed 1031 exchange classifications at http://www.realtyexchangers.com/1031_Exchange_Information_Center/Topic_2_-_Qualified_Property.php#Mixed Classifications.

Perhaps a complete explanation of Dealer property is in order.

To be classified as dealer property, the property must be held at the time of sale or exchange as:

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 a sale or exchange are

sales activities related to the property, and 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.

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.

Related Info: dealer, friend, bought, land, sale, estate, real, related, activities


In a 1031 Exchange, do I adjust the sales price

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.

Related Info: price, sales, adjust, option, money, treated, sale, payment


I heard I could take boot from a 1031 Exchange and defer the tax. How does that work?

Yes. There is an ingenious tax strategy which will permit you to take back boot in a 1031 exchange without paying tax on it now. The Gain from the boot can be deferred into future tax years. It's done by taking back a purchase money installment note from the “buyer” of the Relinquished Property to balance all or part of the equities. When structured correctly, the taxable gain in the note may be reported using the installment method of tax accounting.

If you are an exchange specialist, be sure to tell your clients about this marvelous tax saving strategy. They will love you for it—all the way to the bank.

Related Info: work, defer, boot, strategy, method, accounting, installment, gain


What is the Realtor's role in a 1031 Exchange?

Great question. Many taxpayers and Realtors confuse 1031 Exchange with a straight property sale. Other than the taxpayer reaping the benefits of tax deferment, there is really no difference between a 1031 Exchange and a sale. Procedurally, they are identical, though there are some additional rules for the tax payer and more papers to sign. Your Realtor should represent you as a buyer or seller of property in the same way, he/she will market your property the same and at closing the Realtor will receive the same commission for their hard work. There should be no additional charge from a Realtor to represent you if you are doing a 1031 Exchange. Contact Realty Exchangers, if they do. We want to know which Realtors are charging customers for a 1031 Exchange. We can help you a Realtor who does not charge for a 1031 Exchange.

As a Realtor, you should be comfortable with all of the 1031 Exchange terms and the best place to start is our Free 1031 Exchange Procedure Manual, located at http://www.realtyexchangers.com/1031_Exchange_Information_Center/ProcedureManual.php. Our Manual is FREE and available to anyone needing information about 1031 Exchange.

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Do I need to engage a Qualified Intermediary right away?

If you think you are going to execute a 1031 Exchange, it is better to engage a Qualified Intermediary as soon as possible. Waiting until the last minute can only complicate a process that should be very uncomplicated. Let's say you have a qualified property that you want to exchange. The best time to contact your Qualified Intermediary is right after you've written a Purchase and Sale Agreement with your attorney and the buyer and at the same time you contact a closing company to handle the sale of the property. Your Qualified Intermediary will contact your closing company and can provide them with the documents they need to convert you sale into a 1031 Exchange. Some QI's can turn out documents same day but with careful planning we can the rush which can cause mistakes. When it comes to 1031 Exchange, the fewer mistakes that are made with the paper work, the better!

Related Info: engage, sale, mistakes, closing, company, documents, time


Can you do a 1031 Exchange with your son?

The IRS has laid out some specific rules regarding a 1031 Exchange with relatives. Careful review of our 1031 Exchange Knowledge Base regarding 1031 exchange with relatives reveals,
"Exchanging with a related party is OK - but to qualify for §1031 treatment, you must know exactly what an exchange with a related party really means and the rules for making it work.
There are two kinds of exchanges involving related parties. One is a direct swap between related parties. The other is an exchange involving a sale of the Relinquished Property and the acquisition of a related parties property.
First, let’s look at the direct swap. It may qualify for 1031 treatment but a special 2-year rule applies that could result in triggering the gain when you least expect it. This rule affects all like-kind exchanges between related parties including reverse exchanges. Under this rule if you or the related party disposes of the property within 2 years after the exchange, the exchange is disqualified and gain or loss will be recognized for both you and the related party as of the original date of the exchange.
Some exchanges involving related parties are not subject to this unforgiving rule. These exchanges do not involve the direct swap of properties between related parties but related parties are involved. Here is an example of this frequent kind of exchange:
You are the owner of a property you want to sell. Your daughter owns the property you wish to acquire. She is not interested in your property but is willing to sell her property. You find a buyer for your property (Relinquished Property) but before closing the transaction enter into an exchange agreement with your Qualified Intermediary. As part of the exchange, you purchase your daughter’s property as your Replacement Property. Since you are the only party qualifying for §1031 exchange treatment, the exchange is not subject to the 2-year rule. Daughter has a taxable sale.
Before the 2-year rule, taxpayers used the exchange with a related party to sell highly appreciated real estate without recognition of gain. Here is a Parallel Point illustrating how taxpayers used the exchange with related parties to sell highly appreciated property without recognition of gain."

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