YOU HAVE QUESTIONS.
WE HAVE ANSWERS.

After years of conducting tens of thousands of successful 1031 exchanges, we found that there are a number of frequently asked questions related to this type of transaction – many of which are listed below for your convenience. However, if you don’t find the answer to your question here or elsewhere on our website, please give us a call and speak directly to one of our knowledgeable Exchange Officers at 800-339-1031.

Equity and Gain

Is my tax based on my equity or my taxable gain?

Tax is calculated upon the taxable gain. Gain and equity are two separate and distinct items. To determine your gain, identify your original purchase price, deduct any depreciation that has been previously reported, then add the value of any improvements that have been made to the property. The resulting figure will reflect your cost or tax basis. Your gain is then calculated by subtracting the cost basis from the net sales price.

Deferring All Gain

Is there a simple rule for structuring an exchange where all the taxable gain will be deferred?

Yes, the gain will be totally deferred if you:

1) Purchase a Replacement Property that is equal to or greater in value than the selling price of your Relinquished (exchange) Property, and

2) Move all equity from one property to the other.

Definition of Like-Kind

What are the rules regarding the exchange of like-kind properties? May I exchange a vacant parcel of land for an improved property or a rental house for a multiple-unit building?

Yes, “like-kind” refers more to the type of investment than to the type of property. Think in terms of investment real estate for investment real estate, business assets for business assets, etc.

Property Conversion 

How long must I wait before I can convert an investment property into my personal residence?

For the purpose of converting an investment property into your own residence, if you used a 1031 exchange to acquire the investment property, you must hold the investment property for at least 60 months. Initially the property must be leased to a tenant. Providing that you then move into the property and claim it as your principal residence for at least the last 24 months of the 60-month period, under IRC Section 121, you are now eligible for the $250,000 (single) or $500,000 (married) principal-residence tax exemption when the house is sold.

Involuntary Conversion

What if my property was involuntarily converted by a disaster or I was required to sell due to a governmental or eminent domain action?

Involuntary conversion is addressed within Section 1033 of the Internal Revenue Code. If your property is converted involuntarily, the time frame for reinvestment is extended to 24 months from the end of the tax year in which the property was converted. You may also apply for a 12-month reinvestment extension.

Qualified Intermediaries

Is there a difference between Qualified Intermediaries?

Most definitely. As in any professional discipline, the capability of Qualified Intermediaries will vary based upon their exchange knowledge, experience and real estate and/or tax familiarity.

Qualified Intermediaries and Fees

Should fees be a factor in selecting a Qualified Intermediary?

Yes. However, they should be considered only after first determining each facilitator’s ability to complete a qualifying transaction. This can be accomplished by researching their reputation, knowledge and level of experience.

Personal Residence Exchanges

Do the exchange rules differ between investment properties and personal residences? If I sell my personal residence, what is the time frame in which I must reinvest in another home and what must I spend on the new residence to defer gain taxes?

Currently, if a personal residence is sold, provided that residence was occupied by the taxpayer for at least two of the last five years, up to $250,000 (single) and $500,000 of capital gain is exempt from taxation.

Exchanging and Improvements

May I exchange my equity in an investment property and use the proceeds to complete an improvement on a vacant lot I currently own?

Although the attempt to move equity from one investment property to another is a key element of tax-deferred exchanging, you may not exchange into property you already own.

Related Parties

May I exchange into a property that is being sold by a relative?

No. An Exchangor may sell to a related party; however, the related party is subject to a two-year holding period.

Partnership or Partial Interests

If I am an owner of investment property in conjunction with others, may I exchange only my partial interest in the property?

Yes. Partial interests qualify for exchanging within the scope of Section 1031. However, if your interest is not in the property but actually an interest in the partnership that owns the property, your exchange would not qualify. This is because partnership interests are excepted from Section 1031. But don’t be confused! If the entire partnership desired to stay together and exchange their property for a replacement, that would qualify.

Another caveat: Those individuals or groups owning partnership interests, who desire to complete an exchange and have for tax purposes made an election under IRC Section 761(a), can qualify for deferred gain treatment under Section 1031. This can be a tricky issue! Only undertake this election with proper tax counsel and only with the election by all partners!

Reverse Exchanges

Are Reverse Exchanges considered legal?

Although Reverse Exchanges were deliberately omitted from Section 1031, the Internal Revenue Service issued Revenue Procedure 2000-37 in September 2000, which provides a safe harbor for Reverse Exchange transactions.

Identification 

Why are the identification rules so time restrictive? Is there any flexibility within them?

The current identification rules represent a compromise that was proposed by the IRS and adopted in 1984. Prior to that time there were no time-related guidelines. The current 45-day provision was created to eliminate questions about the time period for identification and there is absolutely no flexibility written into the rule and no extensions are available.

In a Delayed Exchange, is there any limit to the number of properties that can be identified?

You may identify up to three properties of any value under the Three Property Rule. If you wish to identify more than three properties, call us for an explanation of the 200% Rule and 95% Rule.

Should identifications be made to the intermediary or to an attorney or escrow or title company?

Identifications may be made to any party listed above. However, many times the escrow holder is not equipped to receive your identification if they have not yet opened an escrow. Therefore, it is easier and safer to identify through the intermediary, provided the identification is postmarked or received within the 45-day identification period.