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1031 Basics
It starts with “like-kind” properties.
Any real or personal property can be exchanged, provided it’s held “for productive use in trade or business,” or “for investment,” and is exchanged for property of like-kind that will also be held for one of these same purposes.
Most real property is considered “like-kind” to other real property. A single-family rental unit for example, may be used to acquire another like it, or to purchase a warehouse, retail center, or office building. Like-kind limitations on personal property are more restrictive; assets must be classified similarly under government accounting classifications.
The rules are clear and simple:
IDENTIFICATION PERIOD
The property you’re acquiring must be identified within 45 days of the transfer of the first relinquished property.
EXCHANGE PERIOD
The acquisition of your replacement property must be completed by the earlier of 180 days from transfer of the relinquished property or the due date of your tax return for the year in which the relinquished property was transferred.
You may identify the replacement property by your choice of the:
3-PROPERTY RULE
Three properties, no matter what their value, or
200 PERCENT RULE
Any number of properties, as long as their combined fair market value isn’t more than twice that of all the relinquished property, or
95% RULE
Any number of properties, regardless of their combined fair market value, as long as you acquire 95 percent of the total value.
FAQ
What is a 1031 Exchange?
A 1031 Exchange allows you to dispose of investment properties and acquire “like-kind” properties, at the same time deferring federal capital gains taxes. Most states with capital gains tax offer this same tax advantage as well.
Why would I do a 1031 Exchange?
A 1031 Exchange lets you reinvest proceeds that would normally be paid to the government as capital gains taxes. By doing a 1031 Exchange it allows you to increase the amount you are able to reinvest.
When is it too late to decide to complete a 1031 Exchange?
Once property has been conveyed to the buyer and you have received actual or constructive receipt of the cash proceeds. Any time before that Mountain States Exchange can hep you complete a 1031 tax deferred exchange.
When and where do I need to sign the exchange documents?
Mountain States Exchange prepares all the exchange documents and forwards them to the closing agent to allow for one convenient closing transaction. All exchange documents need to be signed before or at the closing of the transaction.
When does the 45 day identification and 180 day exchange periods really start?
The clock starts when property has been conveyed to the buyer. In most cases that is when a deed has been recorded transferring ownership, but that is not always the case.
What is common misunderstanding about completing a 1031 exchange?
You must acquire a property or properties of equal or greater net value and net equity. Most often exchangers forget that you must replace the debt that you had on the property that was sold.