Frequently Asked Questions

 

What is a 1031 Exchange?

A means of selling one property and buying another without paying any income tax. The income tax is not eliminated, it is "deferred."


Who Qualifies to use a 1031 Exchange?

Any person or entity, foreign of domestic, including corporations, partnerships, trusts, and limited liability companies. Owning "qualified property".


What is a Qualified Property?

Real or personal property that is held at the time of sale for productive use in a trade or business or for investment. This qualifies as the "relinquished property" sometimes, referred to as the "down leg." "Like kind" real or personal property is property that, at the time of acquisition, is to be also held for the productive use in a trade or business or for investment. this qualifies as the "replacement property" sometimes referred to as the "up leg" in an exchange transaction. Undivided interests in Real Property (" you do not have to own 100%" )


Why would you want to sell your investment property?

Eliminate management responsibilities
Put "dormant equity" to work
Diversify real estate holdings
Consolidate real estate holdings


How do you start to do a 1031 Exchange?

Decide to sell your investment property. (You may have to make it an investment property first)
List your property with knowledgeable real estate broker
Be sure your sales agreement contains an "exchange cooperation clause"
Start your search for a replacement property and a "Qualified Intermediary"


Why would I buy an Undivided Interest Instead of Owning Outright?

Size of investment
Management
Timing
Bargaining power
Market source
Potentially higher return
Avoid difficulty in finding replacement property of the right size


Can I keep any money from the sale of my property for other uses?

Money kept is "Boot" even if you later reinvest it. Don't touch it!!!
Refinance relinquished property before you sell.
Finance replacement property after you purchase.
Get competent tax advice.


What is Boot and what happens when I receive some?

Receipt of anything of value other than qualified property is boot.
Watch out for "constructive receipt" .
Pay tax on the full amount of the boot received.
No allocation between basis and gain is allowed.
Be aware of "mortgage boot".


How much time do I have to do a Delayed Exchange?

Identification period - 45 days purchase period - 180 days
Both run simultaneously, not in succession, and both clocks start on the day of the sale
Not extended for holidays or weekends


Is there more than one type of exchange?

Yes.
Simultaneous - Involves 2 parties, Qualified Intermediary helpful.
Delayed (Starker) - Involves 3 parties, Qualified Intermediary mandatory.
Reverse - Involves 3 parties,Qualified Intermediary mandatory.