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Frequently Asked Questions
What is a 1031 tax-deferred exchange?
Why should I exchange rather than just sell my property?
What is a Tenant-in-Common (TIC)?
What are the guidelines in order to defer all taxable gain?
What kinds of property are eligible for 1031 Tax-Deferred Exchange?
What if I already have a pending sale on my property?
Can I still do an exchange if I have already closed on my property?
Will I ever have to pay the tax that I defer in an exchange?
What is a qualified intermediary and why do I need one?
Can't I use my own Attorney or Accountant to be my Intermediary?
Are there any time restrictions to complete a 1031 exchange?
What if I change my mind about completing an exchange?
What if I cannot identify a replacement property within 45 days or close on a replacement property within 180 days?
What types of property do not qualify for a 1031 exchange?
Do I have to hold the replacement property for a period of time?
Can I buy replacement property from or sell my relinquished property to a related party?
What is a 1031 tax-deferred exchange? [top of page]
It is a method allowed by Internal Revenue Code Section §1031, whereby owners of certain property may sell that property and defer capital gains taxes on the sale if you buy certain new property within a specified time period.
Why should I exchange rather than just sell my property? [top of page]
If the adjusted basis (cost plus improvements minus depreciation) of your property is less than the current sale price, the income tax on the sale can be a considerable amount of money. By deferring the tax, you would have more funds to invest in a replacement property which could potentially translate into an increased return on investment - greater monthly income.
What is a Tenant-in-Common (TIC)? [top of page]
Our investors participate in a tenant in common program. Basically, this means that each owner acquires an interest in a large commercial income producing property and takes title as tenants-in-common. By taking title as tenants-in-common this is NOT any type of partnership. Basically, you own a fractional interest in a larger property, rather than 100% of a smaller property. As a tenant-in-common co-owner, you will enjoy the same benefits (monthly income and depreciation) and rights as if you were a single owner.
What are the guidelines in order to defer all taxable gain?[top of page]
The four basic guidelines for an exchange are (1) the replacement property must be equal to or greater in value than the relinquished property; (2) the equity in the replacement property must be equal to or greater than the equity in the relinquished property; (3) the replacement property must be encumbered by equal or greater debt than the relinquished property; and (4) all net proceeds must be used in acquiring replacement property; if not then "boot" may have to be paid.
What kinds of property are eligible for 1031 Tax-Deferred Exchange? [top of page]
Any property held for productive use in a trade or business or property held for investment purposes can be exchanged for any like-kind property; property may be real or tangible personal property such as an apartment building, raw (vacant) land, single family rental, shopping center, 30 year or more leasehold interest; like- kind property refers to the nature of the property (i.e. held for use in a business or for investment) not the use of the property - so a shopping center may be exchanged for an apartment building or an apartment building may be exchanged for office or industrial or vice versa; furthermore, one property can be sold and three properties acquired; or four properties can be sold and one acquired. Royalties are fully eligible to be exchanged for "Brick and Mortar" real estate.
What if I already have a pending sale on my property? [top of page]
There is still time. You can change the sale to a tax deferred exchange through use of the proper procedures as long as the sale has not closed. Seek the help of your experienced 1031 exchange consultant.
Can I still do an exchange if I have already closed on my property? [top of page]
No, you cannot exchange a property after it has already sold, primarily because you have had access to the proceeds. Advance planning is required to process a 1031 exchange.
Will I ever have to pay the tax that I defer in an exchange? [top of page]
The deferred tax on an exchange will be due only when you sell the replacement property. If you hold the property until you die, through proper planning, your heirs can inherit the property at a "stepped up equity basis" and no capital gains tax is owed at that time. This is a great topic to bring up with your tax advisor and or estate attorney.
What is a qualified intermediary and why do I need one?[top of page]
A qualified intermediary is a neutral party who facilitates the exchange of the relinquished property and the acquisition of the replacement property by having such sale and acquisition flow through the qualified intermediary and by providing proper documentation to preserve the integrity of the transaction. Furthermore, the qualified intermediary safeguards the proceeds from the sale of the relinquished property and transfers such proceeds either to (i) the seller of the replacement property or (ii) back to the initial owner if a replacement property is not identified within 45 days or a replacement property is not closed on within 180 days.
Can't I use my own Attorney or Accountant to be my Intermediary? [top of page]
No. The IRS states that if you have used your Attorney or Accountant within 2 years of your exchange they are disqualified from acting as your intermediary.
Are there any time restrictions to complete a 1031 exchange? [top of page]
Yes. Once you have sold the relinquished property, you have 45 days from the date of such sale to identify the replacement property and 180 days from the date of such sale to close on all of the replacement property.
What if I change my mind about completing an exchange? [top of page]
Once you have entered into an exchange agreement and the transaction has recorded, you are to be given every opportunity to complete the exchange. The IRS requires that the Intermediary not release the exchange funds to the exchanger until the 45 day Identification Period has expired without an identification of replacement property. You may then receive your exchange funds as the exchange has failed and you are now subject to capital gains tax.
What if I cannot identify a replacement property within 45 days or close on a replacement property within 180 days? [top of page]
If you cannot acquire identified property, the exchange funds will be returned to you after the 180 day exchange period, and you are now subject to capital gains tax on the sale of the relinquished property.
What types of property do not qualify for a 1031 exchange? [top of page]
Stocks, bonds, partnership or LLC interests, personal residences and stock in trade or inventory.
Do I have to hold the replacement property for a period of time? [top of page]
The IRS, as yet, has not set a specific time requirement for holding replacement property. However, the holding period must be long enough to show there was intent to hold such property for investment or use in a trade or business.
Can I buy replacement property from or sell my relinquished property to a related party? [top of page]
Yes, but the Code requires you to hold the replacement property and the related party not to sell the relinquished property for two years. Furthermore, there are a number of additional complex rules regarding related parties as they pertain to partnerships, corporations and trusts.
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