1031 Exchange FAQ
Frequently Asked Questions About 1031 Exchanges
What is a 1031 tax exchange?
A 1031 exchange is an important tool that real estate investors can use to defer capital gains taxes on their properties. Investors can diversify their holdings and obtain better investment properties because 1031 exchanges allow investors to use the full power of their
equity without being subject to taxation at the time of purchase.
What is a “qualified intermediary”?
A qualified intermediary or “QI” is an individual who enters into an agreement with a taxpayer to complete a 1031 exchange. The QI acts as the driver of the exchange and holds the exchange funds on behalf of the taxpayer. The QI also works closely with the individuals involved in the transaction (realtors, title company employees, attorneys, etc.) to ensure proper transfer of all properties involved in the exchange. A number of people CANNOT act as your QI. These include yourself, your real estate agent, your attorney, your CPA/accountant, or your securities broker.
Which types of property can qualify for a 1031 exchange?
One or more properties held for productive use in a trade or business or for investment can be eligible for a 1031 exchange. You may sell an eligible property and purchase property of “like-kind.” In the context of a 1031 exchange, “like-kind” is very broad and means that any type of investment property may be exchanged for any other type of investment property. For example, this means you may trade a single-family residential rental for commercial property. (Both properties must be located in the United States).
Which types of property DO NOT qualify for a 1031 exchange?
Primary residences should never be bought or sold as part of a 1031 exchange. Second homes or vacation homes may qualify in limited circumstances, so please call us for further info if this applies to your situation. Partnership shares, stocks, bonds, certificates or trust, or similar types of property, are also excluded from 1031 exchanges. “Fix-and-flips” as well as properties that are held as inventory do not qualify for 1031 exchanges.
How much time do I have to complete my exchange?
There are two major deadlines involved when completing an exchange: the 45 Day Identification Period and the 180 Day Exchange Period. A taxpayer must identify replacement properties to the qualified intermediary within 45-days after the closing of the relinquished property. All replacement properties must be purchased and closed within 180 days of the sale of the relinquished property.
If I want to cancel my exchange or I won’t be able to complete my exchange, when can I get my money back?
A taxpayer may never receive funds back prior to the expiration of the 45 day identification period. Once this period ends, the taxpayer may receive his/her funds once the taxpayer has received all of the replacement property to which the taxpayer has timely identified. Here are two examples to help clarify:
Mary sold her rental house and identified a condo unit that she wants to purchase and rent. Mary closes her purchase of the condo, but she still has $1,000 left over in her exchange account. Mary may receive her funds back after closing on the condo purchase because she has closed on all properties that she identified during the 45-day identification period.
But suppose Mary identified two condos, purchases one, and still has $1,000 left in her account. She does not want to purchase the second condo on her list. LTEC would not be able to return her funds until the 180-day exchange period ends, because she has not closed on all identified properties. Mary may also declare on her identification form that she only intends to purchase one of the
properties on her list. This would allow LTEC to return the excess funds after she completes her first/only purchase. In both examples, the leftover funds may be subject to taxation once they are returned.