What is 1031?

What is a like-kind exchange?
A like kind exchange, also known as a 1031 exchange, is a technique for deferring the gain on the sale of property by reinvesting the proceeds in like-kind property. The gain does not become taxable until you actually “realize” it, which means you convert your sale proceeds into cash.

What is the primary benefit of a Deferred Exchange?
The primary benefit for owners disposing of business or investment held property is the opportunity to defer the payment of Capital Gains Tax indefinitely.

When was the idea of 1031 Exchanges developed?
In 1921 the first exchange laws were enacted.  Changes have been made, but it wasn’t until 1991 when the Regulations were made available that this concept of dispositions has become very popular. The theory is that if one does not cash out of an investment, the economic gain has not been realized in a way that produces the cash to pay the tax.

Can I acquire more than one piece of property?
You may sell one relinquished property and acquire any number of replacement properties. As long as the value that you sell is at least the value you purchase, there will not be a taxable event.

What is the term “trading up?”
Trading up means adding money to an exchange and acquiring an even more expensive piece of property than the one you sold. It may also mean using all your proceeds from the sale to purchase a property with a mortgage or debt associated with it. In either event, you end up with a property that has a greater fair market value than the one you relinquished.

Can I use part of the cash from the transaction for other means and use the remaining proceeds to do a real estate exchange?
Yes, but the cash will be subject to taxation – generally at capital gain rates. This is called a partial exchange.

How much time do I have to do a 1031 Exchange?
You have 45 days from the day you close your relinquished property and escrow your funds to identify the replacement property(s) you wish to acquire. This is known as the Identification Period. You then have an additional 135 days, or until your tax return is due in which to close your replacement property purchase. You cannot exceed the maximum 180-day period for the exchange to take place. The IRS has absolutely no forgiveness for missed time deadlines for any reason.

Will I ever have to pay taxes on the property?
Only when you finally sell the property you have exchanged into without doing another exchange. You can continue to roll over sold properties into new ones without tax obligation. 

Can I use my exchange dollars to build on property that I already own?
 No.

Can I use a Build to Suit Exchange as a replacement property?
Yes, but you must take the title within 180 days or when your tax return is due, whichever is sooner.

How will a 1031 Exchange affect my Estate Planning?
Under current tax law, if you hold the exchanged property until death, your heirs receive a stepped up basis to fair market value, and the capital gain is never taxed. This means the income taxes that were deferred by you now become permanently tax-free to your heirs.

If I want to use a 1031 Exchange, but my co-owner wants to cash out and take his money, is that allowed?
Yes, however, his portion will be subjected to the tax on any profit/gain. Partnership interests cannot be used as exchanges, however the entire partnership may conduct an exchange.

Can I exchange my property for a property in another state?
Yes, anywhere in the USA including its territories. Foreign jurisdictions do not qualify.

What types of real estate qualify for a 1031 Exchange?

What types of real estate will not qualify for a 1031 exchange?
Property held as a “dealer” in real estate will not qualify for 1031 treatment. This simply means that if a person or corporation acquires property with the intent of a fast re-sale, then the transaction won’t qualify. The IRS has limited exchanges to those properties held for productive use in a trade or business or for investment and necessarily excludes those held primarily for sale.

What are the requirements to complete a 1031 Exchange?
The seller must dispose of either business or investment-held property.

The seller must acquire other business or investment-help property of equal or greater value than the fair market value of the property being sold, and all of the equity from the property being sold must go into acquiring the replacement property.
The owner on the relinquished and the owner on the replacement property must be identical

Can I trade out of several smaller properties for a larger one?
Yes, as long as the replacement property equals or exceeds the total value of the smaller properties

If I take title in a replacement property as a Tenant in Common with other owners, will I receive all of the depreciation and appreciation associated with individual property ownership?
Yes.  At the end of the year, a property manager will typically send a statement outlining the depreciation on the building, fixtures, equipment etc. When the property sells, you will receive your portion of any appreciation that may occur as well.

Why does the IRS allow Deferred Exchanges?
The IRS perceives exchanges as a continuity of investment.

Can I refinance my old property before or after I have made an exchange?
Yes, the benefit is that the proceeds (cash out) from financing or refinancing are tax-free.

What happens if I have a mortgage on my relinquished property?
The amount of the mortgage is treated as taxable gain to you.  The only way to avoid this is to acquire a property with an equal or greater mortgage than the one you relinquished.

Is a leasehold interest considered like-kind?
Yes, leasehold interest may be either relinquished property or replacement property in an exchange as long as there are 30 or more years remaining on the lease.

What happens in a failed exchange?
If a taxpayer executing an exchange does not acquire a replacement property and the exchange period straddles two tax years, the transaction becomes an installment sale and is taxable in the subsequent year.

Can I have an Exchange performed on my personal property (non-real-estate)?
Yes, 1031 pertains to personal property too.  Some examples would include: coins, aircraft, furniture, equipment, vehicles, and livestock.