It is recommended that the taxpayer consult with their accountant prior to starting the Section §1031 exchange process to review all of their possibilities regarding the sale of their property and the capital gains that may become due on the sale of said property. Listed below are some of the most frequently asked questions from taxpayers regarding the Section §1031 exchange process.
General
What are your hours of operation?
EST 8:30 a.m. to 5:00 pm M-Th
EST 8:30 a.m to 4:30 pm Fri.
Please contact us anytime by e-mail or fax we will get back to you the same or next business day.
Is the information I provide during the exchange process kept private?
All information is held in strictest confidence. We do not trade, rent or sell this information to outside companies. We only use this information to notify you about services.
How will I know if my request has been received?
All online requests are confirmed via e-mail. If there are any problems, you will be contacted via e-mail or by telephone (if number is supplied) with an explanation.
1031 exchange
How long must the taxpayer own the property they are selling to be eligible for the Section 1031 exchange?
A one year period is commonly suggested, but there has been no statutory or case law.
Can the taxpayer use the Section 1031 exchange replacment property as a primary residence?
No, not initially as the 1031 exchange process is not for this purpose as the taxpayer is only permitted to use the property 14 days out of the year.
Yes, at a later point if the taxpayer purchases property in an exchange and then after one year changes their mind and converts this property to their primary residence it is allowable.
However, it will be necessary for the taxpayer to live in the property for two of five years to exclude capital gains on a primary residence exclusion rule.
Can the taxpayer take any cash from the relinquished property sale (Boot)?
Cash received directly by the taxpayer will be considered boot and taxed as capital gains by the IRS.
The taxpayer can receive funds at the closing on the relinquished property but tax will be assessed on these funds by the IRS.
Does the taxpayer need to be a US Citizen to complete a Section 1031 exchange?
No, although the property exchanged must be in the United States, a foreign national taxpayer/company who owns investment property in the United States may also use the Section 1031 exchange process to defer capital gain taxes on their properties.
Are there ever exceptions to the 45 day designation period and 180 day safe harbour period?
Unfortunately the IRS holds strict guidelines.
On rare occasion due to state of emergencies (9-11-01) or natural disasters such as hurricanes the IRS has made exceptions to their rulings. These exceptions can be found on their website www.irs.gov as needed.
Can I exchange a single-family home for an office building? or for vacant land? condo?
Yes, these are all considered real property like-kind exchanges.
Can I purchase or sell property to a relative?
Yes, but the Section 1031 ruling states that if the related party sells the property within two years, the transactions are disqualified for both parties.
Is it possible for the taxpayer to hold a mortgage for the buyer and still be covered under the Section 1031 exchange?
Yes, there are options for this, please call the office for details.
What is a Section 1031 tax deferred exchange?
The 1031 tax deferred exchange is essentially trading one property for another to potentially defer (delay) the federal income tax – capital gains on the property. It could be considered an interest free loan from the government. Even if you sell this property in the future but continue to exchange (equal or higher values) then the tax can continue to be deferred. At the death of the taxpayer, the capital gain debt is forgiven.
Is it possible to initiate a Section 1031 exchange on the day of closing?
Yes, as long as the closing has not taken place and the funds have not been disbursed.
However, there maybe additional charges due to the late status.
Are there time restrictions for completing a Section 1031 exchange.
There are two time restrictions:
1. 45 day designation - the taxpayer must identify in writing the property they plan to purchase within 45 days from closing on their relinquished property.
2. 180 day - the exchange must be completed within 180 days from the sale of the relinquished property or when the taxpayers federal tax return is due for the year in which the relinquished property was sold. However, it is possible to extend your taxes and appreciate the full 180 day safe harbor period.
Is it possible to purchase items other than real estate with a Section 1031 exchange?
Yes, in addition to like-kind real property exchanges you can exchange personal property; such as boat for boat.
Personal property exchanges tend to be more restrictive in determining like-kind equivalence.
Is a multi asset exchange possible?
It is possible to exchange both real property and personal property in a Section 1031 exchange.
The dollar values would be divided into the two exchanges one for real property and one for personal property and the taxpayer would need to ensure that the personal property they were purchasing matched that which they sold.
What is a reverse Exchange?
A reverse exchange occurs when a taxpayer purchases their replacement property ahead of selling their relinquished property.
The IRS does not allow the taxpayer to own both properties simutaneously in a Section 1031 exchange. Usually the QI will place the replacement property in a Specific Purpose entity until the replacement property is sold to address this issue. The 45 day and 180 day terms still apply.
Replacement Property
How do I determine the value needed for the replacement property in the Section 1031 exchange?
It is necessary in the Section 1031 exchange to invest equal or greater value or there will be some capital gain tax realized on the transaction. The basic rule of thumb is the taxpayer needs to reinvest any mortgage debt plus any cash realized on the sale minus closing costs; real estate commissions and doc stamps.
How long must the taxpayer keep the replacement property in the Section 1031 exchange?
The premise of the Section 1031 exchange is not for a quick turnover of property, we recommend a one year holding period, although there is not statutory or case law.
Is it possible to use Section 1031 exchange funds for improvements on replacement property?
Yes, the exchange funds can be used for capital improvements on the replacement property if the funds are used within the 180 day safe harbor period. Capital improvements are permanent fixtures; roof,deck,tile.
However, the funds cannot be used for property that is outside the scope of the present Section 1031 exchange.
Can a Section 1031 exchange be used for purchasing property and building a house, duplex, etc.?
Yes, to be considered for a Section 1031 exchange all the funds must be dispursed from the exchange account and the deed to the property must pass to the taxpayer prior to the end of the 180 day period.
Where can the taxpayer purchase their replacement property for the Section 1031 exchange?
Replacement property can be located anywhere within the United States of America
Does a vacation home qualify in a Section 1031 exchange?
Yes, if the taxpayer has only used the property for 14 days out of the past year or has rented the property for the six months prior to the sale.
Is there a limit to the amount of properties that can be identified as replacement property in the 1031 exchange process?
The three basic rules for identification are :
3-Property Rule - the taxpayer may identify as many as three replacement properties regardless of their dollar value.
200% rule - The taxpayer may identify any number of properties provided that their fair market value on the 45th day does not exceed 200% of the aggregate fair market value of all their relinquished property.
95% rule - taxpayer may identify any amount but must purchase 95% of the aggregate fair market value.
Can the taxpayer use funds from the Section 1031 exchange account for escrow deposits on the replacement property?
Yes, it is possible to use the funds to pay an escrow deposit on the replacement property. The taxpayer would supply in writing their request along with a copy of the purchase contract indicating the deposit amount.
If the taxpayer moves into the Replacement property, how long do they need to hold the property to be eligible for the IRC Section 121 exclusion?
As of October 22, 2004 the IRC ruling states a minimum of five years is needed to be eligible for the IRC Section 121 maximum exclusions restrictions for capital gain of $500,000.00, married filing jointly: $250,000.00 filing as single.
Qualified Intermediary
Who cannot act as an Qualified Intermediary?
Any agent of the taxpayer ie: taxpayer's attorney, CPA, Realtor or family member.
Why is it necessary to use a Qualified Intermediary?
The Section 1031 ruling states that if the taxpayer takes actual or constructive receipt of the funds or controls the funds then the exchange is ended. The QI is considered a safeguard aganist this by ensuring the funds are not in the control of the taxpayer.
In the Section 1031 exchange who takes title to the propertie(s)?
In a forward exchange, the deed is made directly between the two parties as in a regular real estate closing. The title issue is addressed to meet the IRS rulings through the QI paperwork.
In a Reverse Exchange the title is handled through a Specific Purpose Entity, please call for specific information.
