IPX 1031 - Investment Property Exchange Services, Inc.

What is a 1031 Exchange?

Tax Code Section 1031 allows real estate investors to sell property that has been held for investment or productive use in trade or business and defer capital gains and depreciation recapture taxes if they acquire “like-kind” property of equal or greater value and reinvest all of their equity. The fundamental principle is to permit the property owner to continuing investing and defer taxes that would normally be due on the gain from the sale.

Advantages of a 1031 Exchange:

 - Properties that have been held for an extended period of time and are “tax-locked” can be freed up.

 - Deferred capital gains tax

 - Money available for reinvestment instead of going toward taxes

 - Heirs can receive a stepped-up tax basis equivalent to fair market value

Basic Rules of a 1031 Exchange:

 - Properties must be exchanged for ‘like-kind’ property

 - Property must be held for investment or productive use in trade or business

 - Replacement property must be identified within 45 days

 - Exchange must be completed within 180 days or the tax dues date, whichever is earlier

1031 Exchange Basics        

The rules for a 1031 Exchange are complex. This is a basic overview with the understanding that each transaction is different. When assembling your 1031 Exchange team, a CPA is a must to ensure your individual situation is accurately addressed. That being said, the basic rules are always the same. 

 1)      Only investment properties qualify for 1031 exchanges, not personal residences.
 2)      You have 45 days from the date of transfer of the relinquished property to identify replacement property. No exceptions.
3)      The exchange must be completed within 180 days or the tax due date. For this reason, exchanges initiated after October 15 require exceptional vigilance. 

 Once you have decided to sell a qualified property, contact your CPA and a REALTOR with 1031 Exchange experience. Both are vital to a successful transaction. The CPA will be able to advise you of your current financial situation and help you chart a path for the future. The REALTOR will be able to assist you with the proper documentation and guide you through the steps involved. He or She can also help you select a 1031 Exchange Qualified Intermediary (QI).   Replacement PropertyThere are no limits on the value or number of properties that may be relinquished in an exchange.

There are limitations on how many replacement properties may be identified. One of the following three rules must be adhered to.   

Three Property Rule 

         A maximum of three properties may be identified without regard to the fair market value (FVM) of the replacement properties. 

200 Percent Rule 

         Any number of properties may be identified as long as the aggregate value does not exceed 200% of the relinquished property. 

95 Percent Rule 

         Any number of properties may be identified if, by the end of the exchange period (180 days), the aggregate market value of acquired property is at least 95% of the aggregate market value of all properties identified.  

Properties for replacement must be identified in writing on or before the end of the 45 day identification period.  I will discuss more about documenting your exchange and holding periods in the next post.