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1031 Tax Deferred Exchange Frequently Asked Questions (1031 Exchange FAQs)
The following 1031 Tax-Deferred Exchange Frequently Asked Questions (FAQs) have been compiled by our team of 1031 Exchange Experts and Advisors to provide our clients and their advisors with answers to the most commonly raised questions and issues regarding Section 1031 of the Internal Revenue Code.
Exeter 1031 Exchange Services, LLC provides these tax-deferred exchange frequently asked questions as a courtesy to our clients and their advisors. While every effort has been made to provide correct, accurate and useful information, Exeter 1031 Exchange Services, LLC does not warrant or guarantee the information and/or opinions in any way. Please read our legal terms and conditions.
Is there ever a situation in which the 1031 Tax-Deferred Exchange is not a good idea?
What are the different 1031 Tax-Deferred Exchange structures?
What type of property can be exchanged under Section 1031?
Can I structure a tax-deferred exchange on vacation property or my second home?
What is a Qualified Intermediary (Accommodator) and do I need one?
What does Exeter 1031 Exchange Services do as the Qualified Intermediary (1031 Exchange Accommodator or 1031 Exchange Facilitator)?
What deadlines apply to a 1031 Tax-Deferred Exchange transaction?
How do I identify a fractional interest or partial interest, such as a tenant-in-common investment property, as my like-kind replacement property?
Can I back-date my identification form to be within the 45-day period?
When should I retain Exeter 1031 Exchange Services, LLC?
Will doing a 1031 Tax-Deferred Exchange make the transaction more difficult?
Do I have to spend all of the 1031 Tax-Deferred Exchange proceeds?
When can I receive my 1031 Tax-Deferred Exchange funds if I do not reinvest 100%?
Can I carry back a note when I sell my property (seller carry-back note)?
Can I sell more than one relinquished property in the same 1031 Tax-Deferred Exchange?
How long do I have to hold the relinquished or replacement property?
What are the fees and/or costs involved with a 1031 Tax-Deferred Exchange?
My escrow closed yesterday. Can I still do a 1031 Tax-Deferred Exchange?
Can the 45- and 180-calendar day tax-deferred exchange deadlines be extended?
If I sell property that was held in my individual name, can I acquire my like-kind replacement property in my corporation?
Can shareholders in a corporation, partners in a partnership or members in a limited liability company structure and complete a tax-deferred exchange?
My lender is insisting that I acquire my like-kind replacement property in a limited liability company even though I sold my property as an individual. Will my exchange still qualify for tax-deferred treatment?
Can I buy shares in a Real Estate Investment Trust (REIT) as my like-kind replacement property?
Can I combine a Section 1031 Exchange with a Section 121 Exclusion?
What are the common 1031 exchange terms, phrases and definitions?
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Here Are Your 1031 Tax Deferred Exchange Answers!
No. Section 1031 of the Internal Revenue Code was first introduced in 1921. The purpose or intent behind a 1031 exchange is to encourage you to reinvest 100% of your net proceeds into like-kind replacement property when you sell qualifying property. You might be interested in reading the History of Section 1031 of the Internal Revenue Code.
1031 exchange transactions are one of the last remaining strategies available to defer the recognition of capital gain and depreciation recapture income taxes on the sale or disposition of qualifying property.
Typically, by selling or disposing of your investment property you will trigger Federal and state capital gain and depreciation recapture income taxes, which will leave you with much less to reinvest. This makes it extremely difficult for you to trade up in real estate value, increase your cash flow and ultimately your net-worth when you have to recognize and pay these income tax liabilities.
By completing a 1031 exchange you can defer your capital gain and depreciation recapture income tax liabilities and therefore keep 100% of your net proceeds from the sale of your investment properties available to reinvest in other like-kind replacement properties, especially to trade up in value and improve your cash flow.
The 1031 exchange allows you to sell or dispose of and subsequently acquire properties in order to reallocate, consolidate or diversify your investment portfolio without paying tax on any capital gain or depreciation recapture taxes.
Section 1031 of the Internal Revenue Code allows you to dispose of certain real or personal property and defer the payment of your federal, and in most cases, state depreciation recapture and capital gain income tax liabilities by exchanging the real or personal property (relinquished property) for qualified use "like-kind" property (replacement property).
Yes, absolutely. 1031 Exchanges are not for everyone and may not be appropriate under certain circumstances. You would generally not want to structure a 1031 Exchange if you have an actual loss on the sale of your real property because you will want to recognize the loss for income tax purposes. Suspended passive activity income tax losses may be used to offset certain gains as well, so you may decide not to structure a 1031 Exchange or to structure a partial 1031 Exchange in order to use up some of your accumulated passive activity income tax losses.
Simultaneous (Concurrent) Exchange:
The exchange (disposition) of the relinquished property (sale property) and the purchase of the like-kind replacement property occurs at the same time.
Forward (Delayed) Exchange:
This is the most common structure or form for most 1031 exchange transactions today. A Forward (Delayed) Exchange occurs when there is a time delay between the transfer (conveyance) of the relinquished property (sale property) and the purchase of the like-kind replacement property. A Forward (Delayed) Exchange is subject to specific time limits, which are set forth in Section 1.1031 of the Department of the Treasury Regulations.
A transactional structure where the like-kind replacement property is purchased first, prior to transferring (conveying or selling) the relinquished property to the actual buyer. The Internal Revenue Service provided guidelines (safe harbors) for structuring reverse 1031 exchange transactions, as outlined in Revenue Procedure 2000-37, effective September 15, 2000. Reverse 1031 exchange transactions structured pursuant to this Revenue Procedure are considered to be "safe-harbor" reverse 1031 exchange transactions and those structured outside of the Revenue Procedure are considered to be "non-safe harbor" reverse 1031 exchange transactions and should only be completed with competent legal counsel. Reverse 1031 exchanges are also referred to as parking transactions or parking arrangements. You can read an overview of reverse 1031 exchanges or learn more by reading an Introduction Safe Harbor to Reverse 1031 Exchanges.
Build-to-Suit (Improvement or Construction) Exchange:
This technique allows the taxpayer to build on, or make improvements to, the like-kind replacement property, using the exchange proceeds before they actually take title to the property.