What is 1031?

Basic Information

A 1031 Exchange, otherwise known as a tax-deferred exchange, is a simple strategy and method for selling one property, that’s qualified, and then proceeding with the acquisition of another property (also qualified) within a specific time frame. Any Real Estate property owner or investor of Real Estate should consider an exchange when he/she expects to acquire a replacement “like kind” property subsequent to the sale of his/her existing investment property. Anything otherwise would necessitate the payment of a capital gain tax, which can exceed 20-30%, depending on the federal and state tax rates of your given state. The two major rules to follow are:

  • The total purchase price of the replacement “like kind” 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, “like kind” property

Basic Rules

  • Title Deed Out = Title Deed In.
  • Exchange “Like-kind for Like-kind”
  • Time clock starts ticking on the day Relinquished property is recorded (COE)
  • Must identify Replacement properties within the first 45 days of the 180 days*
  • Exchanger has a total of 180 days to complete his/her exchange.
  • Exchange up or Equal or more value; not exchange down in value (otherwise taxpayer pays “boot”)
  • Always trade “across” or up. Never trade down. Trading down results on boot received, either cash, debt reduction or both.
  • 3.33% tax on capital gains, if exchanger does not complete his exchange (EAT must forward taxes owed to IRS directly)
  • Do not-over finance replacement property. Financing should be limited to the amount of money necessary to close on replacement property in addition to exchange funds which will be brought to the replacement property closing.