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1031
Exchange
Q &
A
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The 1031 Exchange Explained
1031 Exchange Q&A
Rules to Identify 1031 Exchange Replacement Property |
What
Property Can Be Exchanged?
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Almost every kind of real estate is
considered "like kind" and can be exchanged for any
other real estate including vacant land for apartments,
a rental house for a shopping center or an office
building for a leasehold interest with 30 years or more
remaining as long as you hold them for investment or
business use.
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How
long do I have to identify replacement Property?
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Identification
must be received within 45 days of the close of the relinquished
property.
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When
must the replacement property close?
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The replacement property must close
180 days from the close of the relinquished property
or the date the Exchanger must file their tax return
(including extensions) whichever occurs first.
* There are no extensions for Saturdays, Sundays, or
Holidays.
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Who
controls the exchange?
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The proceeds must be held and controlled
by a Qualified Intermediary NOT by an agent, escrow, or
related party which includes relatives.
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How
do I avoid the tax?
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The IRS says if you touch the money, you
pay the tax. However, if you use a qualified
intermediary to transfer the money from the sold
property into the purchased property, you qualify for a
tax free exchange. The IRS does not permit your
accountant, attorney or escrow company to be your
qualified intermediary.
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What
is boot?
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Any time there is excess money or
unmatched property coming from the relinquished property
there will be a taxable event.
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What
is the adjusted basis?
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Generally it is determined by taking the
sales price when acquired cost of capital improvement
less depreciation (check with clients CPA basis may not
be the sale price).
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Can
I avoid paying taxes?
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Yes, you can. By simply following the
1031 exchange rules every time you sell one or more
properties and buy replacement properties, when you die,
your estate escapes all the capital gains taxes forever.
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What
exactly are the tax benefits?
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You can eliminate paying any capital
gains taxes and you can eliminate paying the even
higher-rate taxes on the recapture of depreciation
you've taken on your property. By exchanging into a
higher priced property, you'll also gain additional
depreciation deductions which can increase your
after-tax income.
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Are
there any non-tax reasons to do a 1031 exchange?
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Yes, there are many non-tax reasons to
exchange. For example, if you no longer like managing
property, you can exchange your management intensive
property for triple-net management free property or
exchange multiple smaller properties for one that can be
professionally managed. Another example would be if your
current property cannot be easily refinance, you could
exchange out of that property for a new property which
could be refinanced more easily so you can take some
cash out. Or, you might exchange to improve cash flow.
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Can
I refinance a 1031 Exchange Property?
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Yes, you can refinance the property you
are selling before you exchange or refinance the
property you are buying after you exchange and the
proceeds are tax-free. Check with a qualified
intermediary for the details as the timing and contract
dates are critical.
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