FAQs

1031 Exchange FAQs

Here are answers to common questions about 1031 exchanges.

A 1031 exchange can be confusing. Fortunately, help is available. With an experienced qualified intermediary (QI) at your side, you are well-equipped to get the information you need to decide if now is the time to pursue a 1031 exchange.

At Banker Exchange, we want to teach you about 1031 exchanges, how they work, and what they offer. We have included answers to some of the most common questions about 1031 exchanges below

A 1031 exchange, also called a like-kind exchange, refers to a swap of one real estate investment property for another. With this exchange, you use the money you receive from your current property to buy one of equal or greater value. As such, you can defer the capital gains taxes associated with this transaction.

A 1031 exchange involves three steps:

  1. Find the properties you want to buy and sell. Identify the investment property you intend to sell and your replacement property.
  2. Hire a qualified intermediary. Choose a QI to handle your 1031 exchange.
  3. Notify the IRS. Complete IRS Form 8824 to share information about your 1031 exchange with the IRS.

A 1031 exchange lets you defer capital gains taxes, giving you additional money to invest in your replacement property. In addition, a 1031 exchange can diversify your investment portfolio. The exchange also allows you to enter or move into a new market without a loss of equity due to taxes.

To fully defer the capital gains taxes in a 1031 exchange, there are four requirements that must be met. Qualified Use, Value Requirements, Mandated Timelines, and Administrative Requirements must all be met to defer capital gains tax.

Qualified Use: Any real property held for investment or used in a trade or business qualifies for 1031 exchange. Like-kind refers to nature or character, not grade or quality. Qualifying property includes raw land, commercial property, single or multi-family rentals, a tenant in common interest, a DST beneficial interest, and ground leases with more than 30 years remaining on the lease term.

Value Requirements: To fully defer capital gains taxes, a taxpayer must be in the same position after acquiring replacement property as they were in the relinquish property meaning all equity from the relinquished property must be reinvested, and all debt from the relinquished property must be replaced.

The exchange requirement equals cash received plus debt relieved. Additional equity can replace existing debt, but additional debt cannot replace existing equity.

Mandated Timelines: The timelines for 1031 exchange are very strict. Section 1031 is the only place in the Internal Revenue Code that does not give extensions for weekends or holidays. The exception to this is a Federally declared disaster area and the IRS issuing a “Disaster Relief Notice”.

The Identification Period and the Exchange Period both start on day 0, with the transfer of the relinquished property. Replacement property must be properly identified within the Identification Period which expires at midnight on the 45th day following the transfer of the Relinquished Property. The Exchange Period expires at midnight on the earlier of the 180th day follow transfer for the Relinquished Property or the due date of the taxpayer’s tax return, including extensions.

Administrative Requirements: The sale of one piece of property and purchase of another property on its own does not qualify for 1031 treatment. A 1031 Exchange requires interdependence of the 2 transactions. This is most easily accomplished by using a qualified intermediary.
  • Simultaneous: The relinquished and replacement properties are transferred at the same time. Two people are swapping properties. This type of exchange does not require the use of a qualified intermediary.
  • Deferred: The most popular or commonly used exchange is the deferred (or forward) exchange. This type of exchange begins with a taxpayer selling the relinquished property and then acquiring the replacement property within the mandated timelines.
  • Reverse: The replacement property is acquired prior to the sale of the relinquished property.
  • Improvement (Construction): The replacement property includes improvements constructed during the Exchange Period intending for those improvements to count toward the Exchange Requirement.
  • Reverse Improvement: the replacement property is acquired prior to the sale of the relinquished property and includes improvements to be made using exchange funds.

A 1031 Qualified Intermediary, known as a QI, is a person or company who facilitates transactions to comply with the Internal Revenue Code section 1031 tax-deferred exchanges.

 

The intermediary can also answer your 1031 exchange questions and define common 1031 terms and phrases.

Banker Exchange makes it easy to complete a 1031 exchange. Our team has many years of experience with 1031 exchanges and is happy to help you in any way we can. For more information or to get started with a 1031 exchange, please contact us today.

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