Strategic 1031 Exchange Advisors
       Raising the Bar in 1031 Exchange
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Frequently Asked Questions

1. Why would a taxpayer want to do a 1031 Exchange?

Most commonly, taxpayers utilize 1031 exchanges to defer capital gains tax on the sale of commercial, business, or investment property that would otherwise be due.  However, there are many other benefits to exchanging.

2. Is a 1031 Exchange a loophole in the Internal Revenue Code?

No. Section 1031 has been a part of the Internal Revenue Code since its inception.  With the addition of several beneficial amendments to the code in 1991, section 1031 may now be one of the most powerful tools available for investors in real estate.

3. What type of property is eligible for a 1031 Exchange?

Any real property that is deemed to be like-kind is eligible for 1031 exchange treatment. Additionally, personal property can also be exchanged.  Each state defines real property and personal property in its own way.

4. Is deferral under IRC 1031 only for capital gains?

No. Section 1031 applies to capital gains taxes (15%), depreciation recapture (25%), and state income taxes. Long-term capital gains taxes apply to property held over 1 year. Gains from property held less than a year are typically taxed as ordinary income.

5. Does a 1031 Exchange permanently delete capital gains tax?

No. A 1031 exchange defers taxes; it generally does not eliminate them. The Replacement Property will carry the tax basis of the relinquished property. Upon the sale of the Replacement Property all tax will be due or the taxpayer can enter into another 1031 exchange to defer taxes again. There is no limit to how many 1031 exchanges can be performed, therefore, deferment can be indefinite.

6. Can’t my own attorney or CPA serve as my Qualified Intermediary?

No. A Qualified Intermediary must remain completely independent from the taxpayer and cannot have been the taxpayer’s agent in any other capacity for the past 2 years.

7. Do I have to know what property I will be purchasing when I start the exchange?

No. The taxpayer has 45 days from the sale of the relinquished property to identify the potential replacement properties.

8. Can I back-date my identification form to be within the 45-day period?

Absolutely not! The 45 calendar day deadline is part of the Internal Revenue Code. It cannot be extended by the taxpayer or any party to the exchange under any circumstances. The act of back-dating, altering or changing the identification after the 45 day deadline has passed is criminal tax fraud and should never be considered under any circumstances.

9. How long do I have to purchase my replacement property?

The taxpayer has 180 days from the sale of the relinquished property to purchase and take title to the replacement property/properties.

10. What happens if my 45th or 180th day falls on a Saturday, Sunday, or holiday? Are there any extensions to these dates?

No. These deadlines are actually part of the Internal Revenue Code and cannot be extended for any reason except by a Presidential Disaster Declaration. The deadline is not extended if it falls on a Saturday, Sunday or legal holiday.

11. Do I have to use all the cash proceeds from my sale on my purchase?

In order to completely defer the applicable capital gains tax, all cash proceeds from the transaction must be used. To the extent the proceeds are not used on the purchase, the taxpayer will be responsible for any tax on the difference.

12. I've already sold my property and put it under contract. Can I still do an exchange?

Yes, as long as the sale has not yet closed. An exchange can be set up as late as the day of closing.

13. Can I sell more than one relinquished property in the same 1031 exchange?

Yes. There is no limit to the number of relinquished properties a taxpayer can have within the same 1031 tax-deferred exchange transaction.

14. What is a related party and can I do an exchange with them?

A Related party is defined as lineal ancestors and descendants, brothers and sisters and business entities in which the exchanger owns greater than a 50% interest. Recent rulings have stated that while there is no issue with selling your relinquished property to a related a party, there are certain restrictions when buying your replacement property from a related party. Generally, there are two situations in which it would be acceptable to purchase property from a related party: (1) the related party is also participating in an exchange or (2) the exchanger acquires property from a related party and tax avoidance is not an issue.

15. May a corporation or partnership be involved in a 1031 exchange?

Yes, absolutely. Taxpaying entities of any type are allowed to structure and complete tax-deferred exchange transactions.

16. Can I close on my replacement property before I have a buyer for my relinquished property?

In a Reverse Exchange, the eventual Replacement Property is acquired before the sale of the Relinquished Property. Since the taxpayer has yet to sell Relinquished Property, the taxpayer may not hold the Replacement Property. Therefore, the eventual Replacement Property is “parked” by an unrelated third-party, referred to as an Accommodating Titleholder, until the Relinquished Property is sold. In order to qualify for tax-deferral under the safe-harbor regulations, the Parked Property must be acquired as Replacement Property within 180 days from the day the Accommodating Titleholder purchased it. The fees associated with these exchanges are higher due to the transactional complexity.

17. May I construct my eventual replacement property?

In a Construction Exchange (also known as a “Build-to-Suit” Exchange), the exchange proceeds from the Relinquished Property sale are used to acquire the Parked Property, and to construct improvements on the property. The property must be held by the Accommodating Titleholder until either the improvements are complete or the 180-day exchange deadline occurs. On or before the 180th day, the improved property must be transferred to the Exchanger as the Replacement Property, in completion of the exchange. These transactions may also be structured as Reverse Construction Exchanges. The fees associated with both of these exchanges are higher due to the transactional complexity.

18. If I sell non-income producing property, such as raw land with a very low cost basis, can I 1031 exchange the proceeds into an income producing property?

As long as the property being sold was held for investment and the taxpayer is purchasing property for investment, then the “like-kind” requirement has been satisfied. So, yes absolutely. In fact, this is a great investment strategy, because you are selling a non-productive asset (vacant land) and acquiring a productive asset (commercial office building) on a tax-deferred basis.

19. Can I change the use of my 1031 exchange property? For example, I want to eventually make my beach rental a second home.

Yes, you can change the use of your property. You should always establish your property as investment for ideally 2 years before you change the use of your property. An ideal situation is to move into your 1031 exchange property and make it your primary residence. If you rent the home for 3 years and live in it for 2, you can then sell the property with the primary residence tax exclusion which is 250K exemption if single and 500K exemption if married.

20. How long must I own my property before it is eligible for a 1031 exchange?

There is no statutorily defined holding period for 1031 exchanges. A taxpayer must own the property long enough to establish held-for-investment-intent. A generally accepted industry practice is 1 year and 1 day.

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