| Selling Investment Real Estate through a 1031 Exchange |
Q - What is a tax-deferred exchange?
Through a Section 1031 Exchange, the tax on the gain realized on the sale of investment
property is deferred until some future date. Section 1031 of the Internal Revenue Code provides
that no gain or loss shall be recognized on the exchange of property held for productive use in a
trade or business, or for investment.
A tax-deferred exchange is a method by which a property owner trades one or more relinquished
properties for one or more replacement properties of "like-kind", while deferring the payment of
federal income taxes and some state taxes on the transaction. (Properties do not have to be
identical. You can exchange a vacant lot for an apartment building,etc.)
The like-kind exchange under Section 1031 is tax-deferred, not tax-free. When the
replacement property is eventually sold (not as part of another exchange), the original deferred
gain, plus any additional gain realized since the purchase of the replacement property, is subject
to tax.
Q - What are the benefits of exchanging v. selling?
Through a 1031 exchange you can postpone or potentially eliminate taxes due on the sale of
qualifying properties. By deferring the tax, you have more money available to invest in another
property.
Q - What are the different types of exchanges?
· Simultaneous Exchange: The exchange of the relinquished property for the replacement
property occurs at the same time.
· Delayed Exchange: This is when there is a period of time between the transfer of the
Relinquished Property and the purchaseof the replacement property.
There are strict time limits that must be met.
· Build-to-Suit (Improvement or Construction) Exchange: The taxpayer may build on, or
make improvements to, the replacement property, with the proceeds from the exchange.
· Reverse Exchange: This is where the replacement property is acquired before transferring
the relinquished property.
· Personal Property Exchange: Personal property can also be exchanged for other personal
property of like-kind or like-class.
·
Q - What are some general guidelines to follow in a 1031 Exchange?
· The value of the replacement property must be equal to or greater than the value of the
relinquished property. The equity in the replacement property must be equal to or greater than
the equity in the relinquished property. The debt on the replacement property must be equal to
or greater than the debt on the relinquished property. All of the net proceeds from the sale of
the relinquished property must be used to acquire the replacement property.
Q -Can money be taken out of an exchange account?
There are strict regulations to be followed. You cannot receive any money until the exchange is
complete. If you want to receive some of the proceeds in cash, this must be done before the funds
are deposited with the Qualified Intermediary.
Q - Can a replacement property be converted to the taxpayer's
primary residence or a vacation home?
Holding requirements of Section 1031 must be met before changing the primary use.
Q - What is a Qualified Intermediary ?
A Qualified Intermediary is an independent party who facilitates tax-deferred exchanges.
The QI cannot be the taxpayer or a disqualified person. Under a written agreement with the
taxpayer, the QI acquires the relinquished property and transfers it to the buyer.
· The QI holds the sales proceeds, to prevent the taxpayer from having actual or constructive
receipt of the funds. Finally, the QI acquires the replacement property and transfers it to the
taxpayer to complete the exchange within the required time limits. The taxpayer may not receive
the proceeds or take constructive receipt of the funds in any way, without disqualifying
the exchange.
Q - Does the Qualified Intermediary actually take title to the
properties?
Not in most situations. The IRS regulations allow the properties to be deeded directly between the
parties, just as in a normal sale transaction. The taxpayer's interests in the property purchase
and sale contracts are assigned to the QI. The QI then instructs the property owner to deed the
property directly to the appropriate party.
Q - What are the time restrictions on completing a Section 1031
exchange?
A taxpayer has 45 days after the date that the relinquished property is transferred to identify
potential replacement properties. The exchange must be completed by the date that is 180 days
after the transfer of the relinquished property, or the due date of the taxpayer's federal tax return
for the year in which the relinquished property was transferred,
.
Q - Is there any limit to the number of properties that can be
identified?
There are three rules that limit the number of properties that can be identified. The taxpayer must
meet the requirements of at least one of these rules:
· 3-Property Rule: The taxpayer may identify up to 3 potential replacement properties, without
regard to their value; or
· 200% Rule: Any number of properties may be identified, but their total value cannot exceed twice
the value of the relinquished property
· 95% Rule: The taxpayer may identify as many properties as he wants, but before the end of the
exchange period the taxpayer must acquire replacement properties with an aggregate fair market
value equal to at least 95% of the aggregate fair market value of all the identified properties.
The requirements for a 1031 exchange are complex and you are urged to
seek the advice of your accountant or a qualified intermediary.
Through a Section 1031 Exchange, the tax on the gain realized on the sale of investment
property is deferred until some future date. Section 1031 of the Internal Revenue Code provides
that no gain or loss shall be recognized on the exchange of property held for productive use in a
trade or business, or for investment.
A tax-deferred exchange is a method by which a property owner trades one or more relinquished
properties for one or more replacement properties of "like-kind", while deferring the payment of
federal income taxes and some state taxes on the transaction. (Properties do not have to be
identical. You can exchange a vacant lot for an apartment building,etc.)
The like-kind exchange under Section 1031 is tax-deferred, not tax-free. When the
replacement property is eventually sold (not as part of another exchange), the original deferred
gain, plus any additional gain realized since the purchase of the replacement property, is subject
to tax.
Q - What are the benefits of exchanging v. selling?
Through a 1031 exchange you can postpone or potentially eliminate taxes due on the sale of
qualifying properties. By deferring the tax, you have more money available to invest in another
property.
Q - What are the different types of exchanges?
· Simultaneous Exchange: The exchange of the relinquished property for the replacement
property occurs at the same time.
· Delayed Exchange: This is when there is a period of time between the transfer of the
Relinquished Property and the purchaseof the replacement property.
There are strict time limits that must be met.
· Build-to-Suit (Improvement or Construction) Exchange: The taxpayer may build on, or
make improvements to, the replacement property, with the proceeds from the exchange.
· Reverse Exchange: This is where the replacement property is acquired before transferring
the relinquished property.
· Personal Property Exchange: Personal property can also be exchanged for other personal
property of like-kind or like-class.
·
Q - What are some general guidelines to follow in a 1031 Exchange?
· The value of the replacement property must be equal to or greater than the value of the
relinquished property. The equity in the replacement property must be equal to or greater than
the equity in the relinquished property. The debt on the replacement property must be equal to
or greater than the debt on the relinquished property. All of the net proceeds from the sale of
the relinquished property must be used to acquire the replacement property.
Q -Can money be taken out of an exchange account?
There are strict regulations to be followed. You cannot receive any money until the exchange is
complete. If you want to receive some of the proceeds in cash, this must be done before the funds
are deposited with the Qualified Intermediary.
Q - Can a replacement property be converted to the taxpayer's
primary residence or a vacation home?
Holding requirements of Section 1031 must be met before changing the primary use.
Q - What is a Qualified Intermediary ?
A Qualified Intermediary is an independent party who facilitates tax-deferred exchanges.
The QI cannot be the taxpayer or a disqualified person. Under a written agreement with the
taxpayer, the QI acquires the relinquished property and transfers it to the buyer.
· The QI holds the sales proceeds, to prevent the taxpayer from having actual or constructive
receipt of the funds. Finally, the QI acquires the replacement property and transfers it to the
taxpayer to complete the exchange within the required time limits. The taxpayer may not receive
the proceeds or take constructive receipt of the funds in any way, without disqualifying
the exchange.
Q - Does the Qualified Intermediary actually take title to the
properties?
Not in most situations. The IRS regulations allow the properties to be deeded directly between the
parties, just as in a normal sale transaction. The taxpayer's interests in the property purchase
and sale contracts are assigned to the QI. The QI then instructs the property owner to deed the
property directly to the appropriate party.
Q - What are the time restrictions on completing a Section 1031
exchange?
A taxpayer has 45 days after the date that the relinquished property is transferred to identify
potential replacement properties. The exchange must be completed by the date that is 180 days
after the transfer of the relinquished property, or the due date of the taxpayer's federal tax return
for the year in which the relinquished property was transferred,
.
Q - Is there any limit to the number of properties that can be
identified?
There are three rules that limit the number of properties that can be identified. The taxpayer must
meet the requirements of at least one of these rules:
· 3-Property Rule: The taxpayer may identify up to 3 potential replacement properties, without
regard to their value; or
· 200% Rule: Any number of properties may be identified, but their total value cannot exceed twice
the value of the relinquished property
· 95% Rule: The taxpayer may identify as many properties as he wants, but before the end of the
exchange period the taxpayer must acquire replacement properties with an aggregate fair market
value equal to at least 95% of the aggregate fair market value of all the identified properties.
The requirements for a 1031 exchange are complex and you are urged to
seek the advice of your accountant or a qualified intermediary.
| Call or email me for more information about local intermediaries Eleanor at 239-671-1021 eleval@aol.com |
| Eleanor Valliere, GRI Sand Castle Realty Group, Inc. 2220 Venetian Court Naples, FL 34109 Office: 239-594-2170 Direct: 230-671-1021 |
| Information contained on this site is intended as general interest only. Consult with your own legal, accounting, and real estate professionals for specific advice. |
Your Breckenridge Real Estate Resource
 | |  | |  |