How Does a 1031 Exchange Work?
- Sell Your Current Property: Work with a knowledgeable REALTOR® like us to market and sell your property. Proceeds from the sale must be held by a Qualified Intermediary (QI) to maintain compliance. The total purchase price of the replacement property must be equal to, or greater than the total net sales price of the relinquished, real estate, property. All the equity received from the sale, of the relinquished real estate property, must be used to acquire the replacement property.
- Identify Replacement Property: You have 45 days from the sale date to identify potential replacement properties using one of three IRS-approved methods (see below).
- Close on the Replacement Property: You must close on one or more of the identified properties within 180 days from the sale date or the tax filing deadline for the year of the sale, whichever comes first. You cannot do an exchange once escrow is closed.
What Properties Are Eligible for a 1031 Exchange?
To qualify for a 1031 exchange, properties must be held for investment or business use. Eligible property types include:
- Single-family and multi-family rental properties
- Apartment buildings
- Office buildings
- Shopping centers
- Warehouses and industrial facilities
- Hotels and motels
- Farmland and ranch land
- Vacant land held for investment
The key requirement is that the property is used for business or investment purposes—not personal use.
Why Consider a 1031 Exchange?
- Defer Capital Gains Taxes: Instead of paying taxes now, reinvest the proceeds and maximize your purchasing power.
- Portfolio Growth: Upgrade to larger or more profitable properties, diversify your portfolio, or shift to properties that better meet your investment goals.
- Preserve Equity: Retain more of your hard-earned equity to grow your wealth.
Important Deadlines to Remember
- 45-Day Identification Period: From the closing date of the sale, you have 45 calendar days to identify potential replacement properties using one of the following methods:
- The Three-Property Rule: Identify up to three potential replacement properties, regardless of their value.
- The 200% Rule: Identify any number of properties, provided their total combined value does not exceed 200% of the value of the property you sold.
- The 95% Rule: Identify more than three properties without a value limit, but you must close on at least 95% of the total identified value.
- 180-Day Exchange Period: The entire transaction must be completed within 180 days of the sale of the original property.
Our Role in Your 1031 Exchange
- Collaboration with Qualified Intermediaries: While we are not a QI, we partner with reputable experts to ensure compliance with IRS regulations.
- Identifying and Securing Replacement Properties: We’ll help you locate properties that align with your investment goals and guide you through the purchase process.
- Streamlining the Process: we’ll provide personalized support, helping you stay organized and ensuring that all deadlines are met to protect your exchange.
Frequently Asked Questions
1. Can I do a 1031 exchange for personal property?
No, a 1031 exchange applies only to investment or business properties. Personal residences or vacation homes typically don’t qualify unless they meet specific usage requirements.
2. What is considered "like-kind" property?
IRS states: "Like-kind exchanges -- when you exchange real property used for business or held as an investment solely for other business or investment property that is the same type or “like-kind”... Properties are of like-kind if they’re of the same nature or character, even if they differ in grade or quality. Real properties generally are of like-kind, regardless of whether they’re improved or unimproved. For example, an apartment building would generally be like-kind to another apartment building. However, real property in the United States is not like-kind to real property outside the United States." (Source)
3. Are there any risks with a 1031 exchange?
The main risk is missing IRS deadlines. Partnering with an experienced REALTOR® and a Qualified Intermediary helps minimize those risks.
4. What happens if the replacement property costs less than the original property?
If the replacement property is of lesser value, the difference (called “boot”) is subject to capital gains taxes.
Start Your 1031 Exchange Today!
Whether you’re selling an investment property, seeking your next acquisition, or exploring the possibilities of a 1031 exchange, we are here to help. Let’s work together to simplify the process and make the most of your investment opportunities.
Disclaimer: We are not a Qualified Intermediary or tax advisor. Please consult a QI or tax professional for specific tax guidance.
