Are you in a 1031 Exchange?
1031 Exchange refers to the section of the Internal Revenue Code Section that provides for the tax deferred exchange of real and personal property. If you are in an exchange, or considering doing one, US Realty Partners has a proven track record for seamlessly assisting our clients with the process.
Call US Realty Partners at 214-290-3969 today to discuss your 1031 Exchange needs or fill out the form on this page and we will contact you immediately.
Why Do a 1031 Exchange?
With a 1031 Exchange investors can trade up, consolidate, diversify, leverage or relocate their investments and not be penalized by having to pay either capital gains or recapture (the amount deducted while owning the property is taxable if the property is sold). The taxes are deferred until the investor does a non 1031 Exchange sale or the property goes to the investors estate. 1031 Exchanges can be both a powerful wealth building tool and a way of adjusting investment portfolios to more accurately reflect life style choices and circumstances.
What are the general guidelines for a 1031 Exchange?
The value of the 1031 Exchange replacement property must be equal to or greater than the value of the relinquished property less any selling expense.
The equity in the 1031 Exchange replacement property must be equal to or greater than the equity in the relinquished property.
All of the net proceeds from the sale of the 1031 Exchange relinquished property must be used to acquire the 1031 replacement property.
Constructive receipt of sales proceeds is prohibited during the 1031 Exchange process.
Deadlines for identifying and closing on the 1031 replacement property must be followed.
What are 1031 Accommodators and Qualified Intermediary (QI)?
A 1031 Accommodator is the same thing as a Qualified Intermediary. Frequently 1031 Accommodators are referred to as a QI (short for Qualified Intermediary). The role of the QI or 1031 Accommodator is similar to but not identical to that of a real estate escrow company. Unlike the escrow company the 1031 Accommodator handles the paper work and transfer of title for 1031 Exchanges.
The seller/taxpayer of the 1031 Exchange property enters into a written agreement with the 1031 Accommodator. The duties of the 1031 Accommodator include transferring the relinquished property to the buyer, and transferring the 1031 replacement property to the taxpayer pursuant to the 1031 Exchange agreement. The 1031 Accommodator holds the proceeds from the sale of the relinquished property beyond the actual or constructive control of the seller of the 1031 Exchange property.
What is a 1031 Exchange Boot?
1031 Exchange boot is any property received by the taxpayer in the exchange which is not like-kind to the relinquished property. 1031 Exchange boot is characterized as either “cash” boot or “mortgage” boot.
What is a 1031 Exchange Like Kind?
Real or personal property of the same nature or quality is like kind in a 1031 Exchange. Generally, 1031 Exchange real property is like kind to all other real property as long as it is held for investment or productive use in a trade or business. Foreign real property can be exchanged for foreign real property while US properties can only be exchanged for US properties. Personal Property must be either the same General Asset Class or Product Class for a 1031 Exchange.
What are the 1031 Exchange 45 and 180 Day Deadlines?
The 1031 Exchange clock starts with the close of the property being sold. From the close date there are 45 days to identify the 1031 Exchange properties to be purchased and 180 days to complete the purchase (or the due date for your tax return-whichever is earlier). Both periods are calendar days. If the 45th or 180th day falls on a weekend or holiday, the deadlines still apply. There are no extensions for legal holidays or Saturday or Sunday.
What Constitutes Proper 1031 Exchange Identification of 1031 replacement property?
1031 Exchange Property is properly identified only if you clearly describe it in a written document signed by you and hand delivered, mailed, faxed to the person obligated to transfer the 1031 replacement property to you (called 1031 Accommodator, Qualified Intermediary or QI) or to any other person “involved in the exchange” other than you or any one disqualified under Treasury Regulation 1.1031 (k)-1(K). The 1031 replacement property description needs to be unambiguous. Among other things an acceptable 1031 replacement property description needs to identify the property using the legal description, street address or distinguishable name.
For Deferred Taxes How Much Must be Invested?
The minimum amount to be invested in a 1031 Exchange must be equal to or greater than the sales price on the property being sold less any selling expenses. If there is debt on the 1031 Exchange property being sold that amount needs to be replaced by new debt or cash from the investor’s pocket.
What is the amount of 1031 Exchange Properties that May Be Identified as 1031 Replacement Properties?
1031 Exchange Investors can use any one of the following three rules governing identifying 1031 Exchange Replacement Properties:
Three 1031 replacement property Rule: Any three properties of any value.
200% 1031 replacement property Rule: Any number of 1031 Replacement Properties not to exceed 200% of the sold property.
95% 1031 replacement property Rule: Any number of 1031 Replacement Properties of any value. 95% of identified properties must be closed in 180 days or the exchange will be disallowed.
Can Multiple Owners of a Single Property do a 1031 Exchange into Different Properties?
If the intent of varies owners of a single properties contemplating a 1031 Exchange is to go their separate way it is important to first review with legal counsel the manner in which the 1031 Exchange property title is held before selling. Once any title issues are resolved the property can be sold using a 1031 Exchange. In such a circumstance one investor can do a 1031 Exchange while another can receive cash and pays taxes. It is very important that the investors be clear on their intentions before entering into a 1031exchange agreement with a 1031 Accommodator (also known as Qualified Intermediary or QI). Once the property being sold is closed and all 1031 Exchange investors have entered into an 1031 Exchange agreement with their 1031 Accommodator the exchangers lose their options to divide the proceeds and buy separate 1031 replacement properties.
Do investors in the 1031 Exchange have Access to the Sale Proceeds During the Exchange?
Part of doing a 1031 Exchange is that the investor does not take constructive receipt of the sales proceeds. If no 1031 Exchange property is identified during the 45 day identification period the investor can receive their money on the expiration of the identification period. If the investors identifies properties during the 45 day identification period then does not close on an identified 1031 replacement property the investor will have to wait the full 180 day waiting period to receive their money. There are a few limited exceptions to this1031 Exchange rule.
Are there other ways to do a 1031 Exchange?
Yes, There are five ways to accomplish a 1031 Exchange. They are a Delayed Exchange, Reverse Exchange, Simultaneous Exchange, Improvement Exchange and a Personal Property Exchange.
What is a “multi-asset” 1031 Exchange?
A multi-asset 1031 Exchange involves both real and personal property. For example the sale of a hotel frequently involves both real estate and furnishings and equipment. In this example a 1031 Exchange would be done for the land and building and another 1031 Exchange for the furnishing and equipment in a separate 1031 Exchange. The definition of like-kind for personal property and equipment is much narrower than for real estate.
What is the difference between “realized” gain and “recognized” gain?
Realized gain is the increase in the taxpayer’s economic position as a result of the exchange. In a sale, tax is paid on the realized gain. Recognized gain is the taxable gain. Recognized gain is the lesser of realized gain or the net boot received.