1031 Exchange FAQ
What is a 1031 Exchange?
A 1031 Exchange refers to a real estate transaction realized under the rules of Section 1031 of the Internal Revenue Code in order to defer relevant taxes until a future date. (Section 1031 provides that no gain or loss shall be recognized for tax purposes on the exchange of property held for productive use in a trade or business, or for investment.) A typical transaction involves a property owner trading a property for another "like kind" replacement property. The IRS sees the transaction as having reinvested the sale proceeds into another property thus no economic gain has been realized that would generates the funds to pay the taxes.
What are the benefits of a 1031 Exchange?
A 1031 exchange enables the property owner to defer or completely eliminate potential taxes associated with the sale of real property. By deferring the taxes the owner has more money available, on an interest free basis, to invest and thus can afford a more expensive property then otherwise would be affordable.
What does "like Kind" mean in a Real Estate transaction?
Real properties generally are of like-kind, regardless of whether the properties are improved or unimproved. However, real property in the United States and real property outside the United States are not like-kind properties.
Does this mean I have to actually trade properties?
No. Section 1031 allows for the sale of a property with the proceeds going to a "qualified intermediary" who then holds the funds until the replacement property if ready to be purchased.
What is a "Qualified Intermediary"?
A Qualified Intermediary (also known as an Accommodator) is a person or entity that hold the funds received from the sale of the relinquished property in escrow, until the replacement property is purchased; thereby ensuring that the rules around section 1031 are abided by.
What types of taxes can I defer?
A 1031 exchange allows for the deferment of Federal, and in most cases state, capital gain and depreciation recapture taxes.
Is there a time limit to complete the 1031 Exchange?
Yes, the day which is 180 days after the date on which the taxpayer transfers the property relinquished in the exchange, or the due date of the tax return for the year in which the property was relinquished.
What does not qualify for a 1031 Exchange?
Any of the following do not qualify: Stocks, bonds, loans, partnership interests, personal residences, and certificates of trust.
What is a "boot?"
A "Boot" is anything of value exchanged which is not "like-kind" to the relinquished property. In most cases this takes the form of either cash or mortgage debt to equalize the transaction.