1031 EXCHANGE OVERVIEW AND GUIDELINES
Property must be income producing or held for investment purposes for a minimum of 2 years; meaning the property is not a primary residence or recently changed from a residence to rental property.
Title must transfer in the same manner in which it was held such as, individuals, trusts, LLCs, etc. and must also not be recently changed. Consult with a tax advisor or CPA to determine the exact amount deferrable via 1031 Exchange and other tax specific details.
TYPES OF EXCHANGES
Forward Exchange – The most common type of exchange and simplest to perform. In this case the Exchangor sells the “relinquished” property first, proceeds from that sale pass to the Qualified Intermediary, and are then used to purchase “replacement” property.
Reverse Exchange – The Exchangor works with an Exchange Accommodating Titleholder to purchase “replacement” property first and then selling “relinquished” property within an allotted timeframe to fulfill the obligation to the Titleholder and complete the exchange.
Build-to-Suit Exchange – Often referred to as a Construction or Improvement Exchange and also involves and Exchange Accommodating TItleholder. Proceeds from the “relinquished” property can be used to make improvements or develop property to meet the value obligation and time requirement to complete the exchange.
Because the Forward Exchange is the most commonly performed type of exchange, all the following guidelines will refer specifically to the Forward Exchange. Please contact an Exchange Accommodator for any further questions regarding another type of exchange.
45 / 180 DAYS
There are 2 timeline requirements when performing a 1031 Exchange and both of them are in reference to the closing date of the “relinquished” property. The Exchangor has 45 days from that date to “identify” property and 180 from that same closing date to finalize and close on the identified property.
Identifying property is not a prerequisite to making an offer during an exchange. Identification is required by the 45th day in order to receive the remaining 135 days to close on one or more of the identified properties. If the Exchangor elects to not identify anything by the 45th day, there will be no extension of time and it will be considered a failed exchange and liable for taxes.
Identification is a signed declaration of intent to close on one or more of the properties listed by the Exchangor. Up to 3 properties are allowed to be identified per exchange without penalty and the Exchangor may also choose to purchase 1, 2, all 3, or a combination thereof. Consult your Exchange Accommodator for successful identification strategies involving this rule.
4 OR MORE PROPERTIES
Identifying more than 3 properties is possible, but then the Exchangor must abide by the 200% or 95% rules. The 200% rule states that an Exchangor can identify any number of properties up to 200% of the relinquished property value and close on any number of them. If more than 200% of that value is identified, then the Exchangor must close on 95% of the value of the identified properties.
FULL TAX DEFERMENT
In order for an Exchangor to fully defer their Federal, State, Medicare, and Depreciation Recapture taxes, the must follow all Exchange rules and guidelines.
All proceeds from the sale of the property must pass directly to the Qualified Intermediary upon close. Contact your Exchange Accommodator to set up your 1031 Exchange during escrow.
All identification and timeline rules listed above must be followed. The value of the purchased replacement property or properties must be greater than or equal to the value of the relinquished property. 100% of the relinquished property’s exchange funds, minus real estate related fees and commissions, must be put forward into the replacement property.
Any property value, including debt, not accounted for or any exchange funds not put into replacement property is considered “boot”. Boot is liable for taxes.
Apartment Queen Investments believes that preparation is the key to successful 1031 Exchanges.