What is a 1031 Exchange? You'll be glad you asked!
A 1031 Exchange can be a bit tricky. Be sure to have two people helping you to make sure all steps are followed and completed, your RST Homes agent and a 1031 Qualified Intermediary.
1031 Exchange refers to section 1031 if the internal revenue code. This gives investors the ability to defer capital gains and the recapture of depreciation on the exchange of business use or investment property/properties for another business use or investment property. Please note that personal residences DO NOT quality and property MUST be in the United States. Here at RST Homes we can help you with find those “Real Property” business use or investment properties for your 1031 exchange(s).
A 1031 Exchange Explained
In a 1031 exchange transaction there are two parts that must happen to be successful. A “transfer" of relinquished property and an “acquisition” of replacement property. Sounds easy enough but there are requirements and timelines in which you have to complete this exchange correctly. If the requirement and timelines are not met then the whole 1031 process is unable to be completed and all taxes are due.
The 3 Requirements
The first is the “like-kind” requirement. This is a very broad term, real estate has to be exchanged for real estate, but you can exchange different types of real estate. Examples can be raw land for an apartment building or an apartment building for retail center or an office building for a warehouse. All are real estate and all can be used for business use or investors.
The second is the “same taxpayer” requirement. However the title was recorded on the relinquished property is the same manner in which the new replacement property must be recorded. There are a few exceptions to this rule and can be discussed further with a 1031 exchange professional.
The third is the “deadlines” There are three dates that are VERY important
- The date your relinquished property was recorded, day 1 starts the day after closing
- Identification Period - 45 days from the date your relinquished property was recorded
- Exchange Period - 180 days from the date your relinquished property was recorded (or the due date of the taxpayers federal income tax return, together with all extensions)
Now that we’ve scratched the surface let’s get a little more thorough.
Identifying properties there are 3 rules you can choose from and 1 must be selected in the identification period.
- The 3-property rule – up to three properties can be identified without regard to their fair market value.
- The 200% rule – here you can identify as many properties as you want as long as the fair market value does not exceed 200% of the relinquished property/properties.
- 95% Exception – Any number of properties at any value can be identified as long as 95% of the identified properties are acquired. (Rarely Used)
The other note to make is how to have a fully deferred exchange. This makes sure all funds from the relinquished property are used to that no taxes are due.
- The replacement property/properties must be equal or greater in value
- You must invest ALL monies from the relinquished property/properties into the replacement property/properties
- You must re-acquire debt equal or greater to the debt paid off from the relinquished property. Or replace the debt with additional cash.
If you have further questions, please Contact us and let us know!!
1031 Qualified Intermediary - Preferred
Charmine Difulvio, Certified Exchange Specialist
Senior Vice President
First American Exchange Company
Phone: 775-826-3330 | 866-993-1031