1031 Exchange

In general, a “1031 Exchange” refers to the Internal Revenue code section 1031 that offers a real estate investor (or trade or business owner) the opportunity to defer all capital gains tax owed from the sale of an investment or trade or business property.

A list of our team's professional services

  • Personal representation and consultation throughout the entire process.
  • All documents necessary to complete both phases of the exchange.
  • Fast, efficient and accurate turnaround of documents and wire services.
  • Full coordination with all advisors and parties involved in your transaction.
  • Professional guidance to DST's for diversified, already identified, properties.
  • Representative assistance available at real estate closings.
  • Free consultation with our experienced staff, including multilingual capabilities.
  • Access to our qualified intermediaries.
  • Full onsite 1031 exchange training for CPA's, real estate brokers, attorneys and their staff upon request.

Learn more on 1031 Exchange -DST

 

8 basic rules to follow for a successful 1031 exchange:

  1. To take a 100% deferral of the Capital Gains tax, the Investor, also known as the Exchanger must   reinvest ALL the equity and debt from the sale of the property into another investment property of equal or more value.
  2. The property the Investor/Exchanger sells is called the Relinquished Property.
  3. The property the Investor/Exchanger buys with the proceeds is called Replacement Property.
  4. To avoid issues about the validity of handling the exchange, the option that is most frequently used is for the Exchanger to hire a third party known as a Qualified Intermediary (also known as a Q.I., Accommodator or Facilitator) to do the necessary paperwork for both transactions, hold the proceeds in an escrow account and make such funds available for the purchase of the new property.
  5. Both the Relinquished and Replacement properties must be investments or used in a trade or business. For 1031 Exchanges dealing with real estate (they can be used for other property), the real estate can be land or an improved property. If the property is an improved property, then there should be either a rental history or at least a legitimate attempt to rent it out for use it in a trade or business. A primary residential home or “flipped” properties are not eligible.
  6. The Exchanger is bound by a strict time line to close on both transactions:

a. The Exchanger has 45 calendar days from the close of escrow on the Relinquished Property to provide written identification to the Intermediary of up to three properties he/she is considering buying as a replacement property. If the Exchanger needs to identify more than three properties, additional restrictions apply.

b. The Exchanger has 180 calendar days from the close of escrow on the Relinquished Property to close escrow on whichever identified property(ies) are to be used as the Replacement Property.

  1. At the closing of the Relinquished Property the Exchanger and Intermediary sign a “Like-Kind Exchange Agreement”. This establishes their relationship. The Exchanger and Intermediary sign an “Escrow Instructions” document, defining the handling of the escrow. The Exchanger and Buyer sign an Assignment of Contract, which assigns the contract to the Intermediary. When the Relinquished Property closes, the proceeds are wired to the escrow account of the Intermediary. It is on this transaction that the Intermediary usually collects their fee.
  2. When the Exchanger sets up the closing on the Replacement Property, the Intermediary coordinates with the closing agent to wire the money for the closing and send the necessary documents for the closing.


We recommend that any tax payer considering a 1031 exchange should consult with their tax professional to discuss the specifics of their situation. We will work in conjunction with your tax professional and an expert qualified intermediary to help guide you through the entire process.

This information is provided by IFSG as a general guide to understanding 1031 exchanges only. IFSG does not give legal or tax advice.


12 Common Myths about the 1031 Exchange process


1. You must find someone with whom to exchange.
2. You can only exchange certain properties.
3. Your property must be qualified.
4. You may only use your equity (cash) from the sale.
5. You can just file some paperwork and use a separate bank account to do an exchange.
6. You must buy a similar type of real estate.
7. You cannot do an exchange with partners.
8. You must use all the money from the sale or the exchange is invalid.
9. You can decide to do an exchange after you close on your sale.
10. You must register the exchange with the IRS when you complete it.
11. If your exchange fails, you will be penalized.
12. Only an accountant can do an exchange for you.


The 10 Biggest Mistakes Investors May Make When Conducting a 1031 Exchange


1. Trying to do a 1031 Exchange after the escrow has closed.
If an investor closes a sale and receives the proceeds from it, a taxable event has occurred. At this point it is too late to do an exchange. All investors should investigate the possibilities of a 1031 Exchange when they first consider selling their investment property.


2. Not seeking competent professional advice / having the right team.
The value of an investor's advisory team should not be overlooked. It has often been said that a little
knowledge can be dangerous. Find excellent professionals and hire them.


3. Trying to use your own attorney, accountant or real estate broker as a Qualified Intermediary.
Under the IRC Sec.1031 regulations, an investor's personal attorney, accountant or real estate broker fail to meet the test of being at “arms length” due to the agency issue.


4. Not knowing the time periods in an Exchange.
The IRS gives an investor 180 calendar days to finish their exchange. They must identify the properties
they're considering within the first 45 days. This time period starts when they close escrow on their sale and finishes when they close escrow on their purchase(s). If an investor misses either date, their exchange fails.


5. Not knowing how to combine an exchange with partners.
If the investor doesn't have enough proceeds to buy another property, they can buy that property with partners and still finish the exchange as long as they stay within the guidelines.


6. Trying to use the 1031 Exchange provisions for your personal residence.
A 1031 exchange cannot be used for a personal residence.


7. Cashing out and not considering the tax implications of the sale.
Whenever an investor plans to sell real property, the tax implications should always be considered. The tax consequences of a sale normally become greater the longer the property is held. Always know what your tax implications are before you enter into an exchange.


8. Not dissolving the Partnership properly prior to the Exchange.
There are several issues regarding this, please consult your team for the best strategy for your situation.


9. Not recognizing the impact of debt on the property.
When an investor does a 1031 exchange, BOTH the equity and the debt must be replaced.


10. Knowing when NOT to do a 1031 Exchange.


For many people, real estate is their biggest investment. Since each situation and transaction is different,
we will work together with you, your CPA, and a qualified intermediary (which we can suggest) as a team of professionals, to see the best direction for each of your transactions.

 

 

IF YOU HAVE ANY QUESTIONS OR NEED A STRATEGY SESSION FOR YOUR SITUATION, PLEASE CALL US AT (561) 798-5678. IFSG does not give tax or legal advice.