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1031 Exchange Q&A

· Q. What properties qualify for a 1031 exchange?

In a 1031 exchange, real property must be exchanged for like-kind real property and real property is not considered like-kind to personal property.

•Qualifying Real Property

•Unimproved property.

• Improved property.

• Vacant land.

• Net-lease property.

• Commercial buildings.

• Rental properties.

• Farms or ranches.

• Resort property

Industrial property

Retail property

Office buildings

Self-storage facilities

Senior-living centers

Hotels or motels


Daycare facilities

Tire and automotive stores

Tenant In Common or TIC properties - fractional ownership properties

· Q. Can you gift a 1031 exchange property? Many people are unaware that you can conduct a 1031 exchange of property that you received as a gift. If you held the gifted property for a qualified purpose, which is for investment purposes or for use in your trade or business, then you should be able to defer the federal capital gains taxes

· Q. How long do you have to hold property in a 1031 exchange? The only minimum required hold period in section 1031 is a “related party” exchange where the required hold is a minimum of two years.

· Q. Can you 1031 into a property I already own? Generally, no, you cannot sell real property ("relinquished property") and defer the payment of your depreciation recapture and capital gain income taxes by structuring a 1031 exchange, or by building on real property that you already own or by paying off the mortgage on the property.

· Q. What happens when you sell a 1031 exchange property? A 1031 exchange allows an investor to sell a real estate asset and purchase a "like- kind" asset without paying capital gains taxes on the sale -- even if they made a

massive profit...... That means the deferred capital gains tax on the property you sell will become due when the replacement property is sold.

· Q. Can you do a 1031 exchange with family? Related party 1031 Exchanges are permitted provided you follow specific rules and guidelines issued by the Internal Revenue Service. Related parties include, but are not limited to, immediate family members, such as brothers, sisters, spouses, ancestors and lineal descendents.

· Q. Can you do a 1031 exchange on your primary residence? When you sell a primary residence, you can exclude as much as $250,000 of capital gains from taxes. $500,00 for a married couple. With a typical 1031 exchange, you can defer capital gains taxes on the sale of a property. You'll still need to pay them eventually. But using this method, you could convert the acquired property to your primary home.

· Q. How much does a 1031 exchange cost? For each 1031 Exchange transaction, the average Qualified Intermediary charges an administrative fee ranging from $750.00 to $1,000.00; additional 1031 Exchange transaction typically carry additional fees ranging from $200.00 to $400.00 each.

· Q. Can I take cash out of my 1031 exchange? You can take some or all of the proceeds from a 1031 exchange out of the exchange and use it for any purpose you like. There are many calculations that are necessary in order to determine whether this would be considered a taxable event.

· Q. When can you not do a 1031 exchange? Another reason someone would not want to do a 1031 exchange is if they have a loss, since there will be no capital gains to pay taxes on. Or if someone is in the 10% or 12% ordinary income tax bracket, they would not need to do a 1031 exchange because, in that case, they will be taxed at 0% on capital gains.

· Q. Does a second home qualify for 1031 exchange? A second home or a vacation home held strictly for personal use with no rental activity at all is considered a second home, and does not qualify for the tax deferral benefits of a Section 1031 exchange. The mortgage interest and real estate taxes are tax deductions on Form 1040 Schedule A of the federal tax return.

· Q. How do you avoid capital gains tax on property? If you sell rental or investment property, you can avoid capital gains and depreciation recapture taxes by rolling the proceeds of your sale into a similar type of investment within 180 days. This like-kind exchange is called a 1031 exchange after the relevant section of the tax code

· Q. Can you do a partial 1031 exchange?

In a word: absolutely. You are not required to reinvest 100 percent of your sales proceeds. When you don't exchange all your proceeds, it's called a “partial 1031 exchange.” The portion of the exchange proceeds that are not reinvested is called “boot,” and are subject to capital gains and depreciation recapture taxes.

· Q. Can you move into your 1031 exchange property?

While you can't do a 1031 exchange directly into a personal residence -- exchanges are limited to real property that is held strictly for investment or business purposes -- you can convert an investment property into personal property so long as you follow the IRS' rules to the letter.

· Q. Can Investment Property convert to primary residence?

First, if you acquire property in a 1031 exchange and then convert it to your primary residence, you must own it at least five years before being eligible for the Section 121 exclusion.

· Q. How do you decide ahead to sell and do a 1031 exchange? Not every purchase is worth doing a 1031 exchange. After all, with all the requirements, costs, and countdown timers, simply paying the tax and moving on may be advantageous. That is definitely a discussion for you to have with your accountant.

· Q. What do you do to list your property for sale that you want to exchange? You simply list your property for sale, as you ordinarily would with a Real Estate Broker… Like us who knows and works with folks that want to do 1031 exchanges! And we will include all the language in the listing paperwork regarding your desire to do a 1031 exchange and then with the buyer's needed willingness work with you to either sell and/or purchase real property.

· Q. When do you begin looking for replacement properties? Remember, the moment the relinquished property is sold, the 45-day countdown begins. Therefore, you should begin looking for deals immediately.

· Q. How do you find a qualified intermediary? We are happy to recommend a few local professionals with a good reputation for you to take a look at.

· Q. How do you Negotiate and accept an offer?

When someone agrees to buy your property, you will need to make sure the paperwork clearly states that a 1031 exchange is taking place on your end, and the buyer will need to comply. Although the buyer does not need to do a lot of work, they may need to sign off on certain paperwork, such as assignments or disclosures.

· Q. How do you close on the sale of your relinquished property?

The title company will handle the closing, as with any other real estate transaction, except that your qualified intermediary will be actively involved in the process, and the funds will transfer to their bank account, not yours.

· Q. How do you Identify up to three properties within 45 days?

Right when you decided to 1031 your property you can officially begin to designate the properties you might pursue. Keep in mind, you can identify up to three properties, or more if you close on 95% of them or the total combined value of the identified properties is less than 200% of the sales price of your relinquished property.

· Q. How do you sign a contract on the first-choice property

Most likely, of the three properties you identify, one will stand out as your first choice. You will need to get that property under contract and open escrow, making sure the seller knows you are purchasing through a 1031 exchange. You could also go under contract on all three of your identified properties, using contingency clauses to back out on the ones you later decide not to pursue.

· Q. How do you involve the Title Company in your 1031 project?

Let your qualified intermediary work with the title company. You, your broker, and your qualified intermediary will work with the title company to make sure to dot all the Is and cross all the Ts. This is actually a fairly simple process, one that your qualified intermediary should be familiar.

· Q. How do you close on the replacement property

Finally, the qualified intermediary will wire your money over to the title company and the property will close as in a normal transaction, deferring your need to pay the taxes until some point in the future, if ever. The beauty of the 1031 exchange is that you can repeat this process over and over again on properties and continue deferring taxes indefinitely. This can help you build some serious wealth over time, greater than if you simply paid the taxes each time.

· The rules regarding 1031 Exchanges investments are complex and should be evaluated with your tax advisor.


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