What is a 1031 exchange?

Questions about 1031 exchanges are a big topic in resort communities. A 1031 exchange is an important tool. Real estate investors can use this to defer capital gains taxes on their properties. Investors can diversify their holdings and obtain better investment properties.  This allows investors to use their equity without being subject to taxation at the time of purchase.

1031 Exchange Intermediaries

A qualified intermediary or “QI” is an individual who enters into an agreement with a taxpayer to complete a 1031 exchange. The QI acts as the driver of the exchange and holds the exchange funds on behalf of the taxpayer. The QI works closely with the individuals involved in the transaction (realtors, title company employees, attorneys, etc.).  A number of people CANNOT act as your QI. These include yourself, your real estate agent, your attorney, your CPA/accountant, or your securities broker.

Which types of property can qualify for a 1031 exchange?

One or more properties held for productive use in a trade or business or for investment can be eligible for a 1031 exchange. You can sell an eligible property and purchase property of “like-kind.”  In other words, any type of investment property can be exchanged for any other type of investment property. For example, you may trade a single-family residential rental for commercial property. (Both properties must be located in the United States).

 Which types of property do not qualify for a 1031 exchange?

Primary residences cannot be bought or sold as part of a 1031 exchange. Second homes or vacation homes qualify in limited circumstances. Partnership shares, stocks, bonds, certificates or trust are also excluded from 1031 exchanges. Fix-and-flips as well as properties that are held as inventory do not qualify for 1031 exchanges.

How much time do I have to complete the transaction?

There are two major deadlines involved when completing a 1031 exchange.

The 45 Day Identification Period

A taxpayer must identify the replacement property within 45-days after the closing of the relinquished property, therefore it is important to understand the dates and deadlines before you start.

The 180 Day Exchange Period

All replacement properties must be purchased and closed within 180 days of the sale of the relinquished property.

Get the latest updates on 1031 exchanges in your area. If you have more questions about 1031 exchanges and how they might benefit you, contact a 1031 exchange intermediary.