1031 FAQs

Owners of investment and business properties may qualify for a Section 1031 deferral. Individuals, C corporations, S corporations, partnerships (general or limited), limited liability companies, trusts and any other taxpaying entity may set up an exchange for business or investment properties under Section 1031.

No. For example, if you sell raw land you can purchase an apartment, condo, duplex, commercial building or any real property as long as it is held for business or investment purposes.

No. According to IRS regulations, the Exchangor cannot have “constructive receipt” of the funds in any way, without disqualifying the exchange. The use of a qualified intermediary is essential in utilizing the IRS-identified “safe harbors”.

Title to the Replacement Property must be held in the same manner as title was held to the Relinquished Property.

John Doe relinquishes property  – – – – John Doe acquires replacement property

ABC Corporation relinquishes property – – – – ABC Corporation acquires property

There are a few exceptions with this rule. A common example is when the Exchangor takes title to the replacement property under an LLC, as the sole member. The new entity is disregarded for tax purposes when the Exchangor uses the same tax identification number.

This is not encouraged; tax advisors and CPAs usually suggest waiting until the exchange is complete and an adequate amount of time has passed. There is a holding period that the IRS looks at to prove the property was purchased as an investment property.  IRS guidelines suggest that the minimum holding period is two years, however, the consecutive tax filing could shorten that term.

Yes, but the Exchangor should establish the replacement property as investment property first. Also, once the property has been converted to the Exchangor’s primary residence or personal use he/she must hold onto the replacement property for a minimum of five years and have lived in the home for at least two of the five years (does not have to be consecutively) before selling the property and taking advantage of the primary residence capital gains exclusion.

NO EXTENSION IS ALLOWED EVEN IF THIS DATE HAPPENS TO FALL ON A SATURDAY, SUNDAY OR LEGAL HOLIDAY (with the exception of a Presidential Disaster Declaration). If the Exchangor does not meet the time limits of the exchange, the exchange will fail and the Exchangor will have to pay any taxes due from the sale of the relinquished property.

Since the Exchangor cannot have “constructive receipt” of the exchange funds, once the funds are deposited into the trust account, the Exchangor cannot receive any money until the exchange requirements have been met. It is possible for the Exchangor to receive a portion of the relinquished property funds at closing, provided this has been discussed and arranged with the Qualified Intermediary ahead of time. This is referred to as “Cash Boot” and is subject to capital gains tax.

In order to meet the safe harbor guidelines, a qualified intermediary must abide by the “g6” guidelines, which place restrictions on the ability of the Exchangor to access funds while the QI is in possession of the exchange funds.

For an exchange to be completely tax-deferred (all gain to be deferred) the reinvestment in the replacement property must be equal to or greater than the relinquished property. The Exchangor may not receive any cash at closing from the relinquished property and all proceeds in the exchange account must be reinvested in the replacement property. If applicable, the new or assumed loan should be equal to or greater than the debt paid off on the relinquished property, or the Exchangor must come in with cash (at closing on the replacement property) to offset the difference.

Yes! Make sure you speak with your tax advisor to determine if an exchange is right for you!

No, US property must be exchange for US property, while foreign property must be exchanged for foreign property.

Yes, the Earnest Money Deposit can be paid from the proceeds.

If you cancel your 1031 Exchange, your proceeds will be returned to you with all accrued interest, on the 46th day.

The exchangor may identify up to three properties at any value or any number of properties, so long as the combined value does not exceed 200% of the value of the relinquished property. If more properties are identified than allowed, the exchangor must acquire 95% of the value of all identified properties, or the exchange will fail.

Once the funds are deposited into your exchange account, there are only certain times funds can be released:

For the acquisition of identified replacement property and routine closing costs.

After the expiration of the 45-Day Identification Period if no property has been identified.

After the expiration of the 45-Day Identification Period and purchase of replacement property if no additional property has been identified.

After the expiration of the 180-Day Exchange Period.