Frequently Asked Questions

IRS section 1031 allows property owners to defer paying taxes on the gains resulting from the sale of a property as long as the owner reinvests the proceeds from the sale into a similar property as part of a qualifying like-kind exchange.
1031 exchanges are often used for estate planning purposes. Upon the death of the property owner, the heirs will take ownership of the property at a comparable market price. Therefore, the heirs will receive a stepped-up basis and avoid all potential taxes on the gains assumed by the original owner.
Any cash or cash equivalent value that is not included in the like-kind property exchange is referred to as Boot. Since the excess cash is not included in the tax deferred 1031 exchange, it would become taxable to the property owner.
A property owner is not required to use all of the proceeds from the sale of a property in order to qualify for a 1031 exchange. Any excess capital that the property chooses to use for personal reasons or reduction on their replacement property debt obligations will become Boot and taxable to the property owner.
In order to qualify for a 1031 exchange, the seller/taxpayer is not allowed to take receipt of the funds from the sales. Therefore, they must enter into an exchange agreement with a third party referred to as a Qualified Intermediary. Through the exchange agreement the “QI” acquires the relinquished property from the taxpayer, transfers the relinquished property from the taxpayer, acquires the replacement property and transfers the replacement property to the taxpayer. The Qualified Intermediary cannot be a related party such as your CPA, attorney broker and the taxpayer must not have had a relationship with the QI within the past two years.
The seller of the property has 45 days from the date of closing on the old property to identify a list of new properties they wish to buy with the proceeds and 180 days from the date of closing to complete the transaction.
The seller of the property has 45 days from the date of closing on the old property to identify a list of new properties they wish to buy with the proceeds and 180 days from the date of closing to complete the transaction.
No, an LLC or partnership interest is considered personal property and many not be exchanged. In some cases, upon the sale of a property, some members of the LLC would like to do a 1031 while others do not. In this case, those members wishing to do a 1031 exchange may perform a “drop and swap.” It is important, however, that you consult with your tax or legal advisor to discuss the issues and timing involved in this strategy.
Your personal or primary residence does not qualify for a 1031 exchange. Couples filing jointly may exclude up to $500,000 of the Capital gain on the sale of the property. In some instances, the owner would like to convert their primary residence into a rental property. This may qualify for a 1031 exchange provided the property is “held for investment.” for a certain amount of time. Unfortunately, there is no definitive answer in the tax code which directly addresses the appropriate time frame the owner must hold the property as a rental property. Consult your tax or legal advisor before engaging in this strategy.
The title holder of the old property must be the exact same (mirror-image) as the title holder of the new property. In some instances, the property owner may require a spouse or business partner to be on the new title in order, for example, to secure a loan. The property owner should seek advice from an attorney or CPA in order to find the most effective way to change an existing title during the 180-day time period.
In some cases, the property owner might find themselves in a position where they would like to or need to acquire the like-kind property first before they sell the property they want to relinquish for the 1031 exchange. In this instance, the owner may perform a Reverse 1031 exchange. While this can be an effective strategy, it is more complex and, therefore, important to understand the all of the rules and structures when performing this strategy.

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