A Word About 1031 Exchanges

1031 exchanges don't have to be difficult, but it is critical that you understand a few modest but important requirements set forth by the Internal Revenue Service in order for your 1031 to qualify for deferred gain treatment and be considered compliant.

The Keys to 1031 Exchanging

The properties you expect to exchange must be 'Like-Kind' properties

The Internal Revenue Service requires that the property you sell, as well as the property you buy must be like-kind. And, like-kind means one of two things. Either property held for investment, or property held for income. And definitely not your personal residence.

YOU MUST UTILIZE THE SERVICES OF A QUALIFIED INTERMEDIARY

The IRS requires that your exchange be completed with the assistance of a Qualified Intermediary or Facilitator. This should be a well-established firm like FYNTEX, so you know that your exchange documentation will be correct and your exchange funds will be safe between the time you buy and the time you sell.

YOU HAVE A TOTAL OF 180 DAYS TO COMPLETE YOUR EXCHANGE

You must complete your sale and purchase within a total of 180 days or whenever your tax return is due. The tax return qualifier means that if you start your exchange late in the year, you might have to file for an extension in order to receive your full 180 days.

YOU MUST IDENTIFY CANDIDATE REPLACEMENT PROPERTIES WITHIN THE FIRST 45 DAYS

Now while you have a total of 180 days to complete your exchange, the IRS requires that you identify some candidate or target Replacement Properties within the first 45 days of your exchange period. Usually this identification is made to your Qualified Intermediary by completing a form which is kept in your exchange file.

Types of 1031 Exchanges

There are a few different types of tax deferred exchanges, depending upon your property and the goal of the transaction. Here are the three main Internal Revenue Code Section 1031 exchange categories.

Deferred Exchange

These are the most common 1031 exchange transactions in which you have 45 days to identify the property you'd like to acquire, and 180 days to complete the sale and all of your purchases.

Improvement Exchange

Sometimes Exchangers need to construct a new Replacement Property or at least improve the property they are acquiring before taking title. This is known as an Improvement Exchange.

Reverse Exchange

There are times when circumstances dictate that you must buy before you sell. This is known as a Reverse Exchange. Reverses can be more complicated, but they are often an effective strategy.

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Avoid These 1031 Exchange Pitfalls

There are a few specific pitfalls which experienced Exchangers always avoid, and with which you should be familiar.

Pitfall #1: Ensure that your exchange proceeds are going to be handled safely by your Qualified Intermediary during the term of your exchange. In most cases this means you should insist that your funds are held in a Qualified Escrow Account at a major bank. This is not only the safest way to have your funds deposited, it also restricts the movement of any exchange funds without the Exchanger's explicit written approval, as well as that of a Bank Officer.

Pitfall #2: In addition, start looking for Replacement Property absolutely as early as possible. The 45 day identification period moves very quickly. Especially in a hot market where there are more Buyers than Sellers.

Historical Facts about 1031 Exchanges

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Annual 1031s

1st Exchange

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ID period

Selecting a Qualified Intermediary

Since the 1031 exchange industry remains largely unregulated, it is important for Exchangers to select an established and experienced Qualified Intermediary with the proper approach and appropriate processing protocols. Here are a few items every Exchanger should insist upon:

  • Technical and Processing Expertise

  • Significant Experience as a Facilitator

  • 24/7 Exchanger Visibility

  • True Funds Security via a Qualified Escrow Account

  • Advanced data security and encrypted communications

1031 Exchange Tutorials and Tools

EASY 1031 EXCHANGE MATH

A completed 1031 exchange not only defers capital gain and depreciation recapture taxes, it dramatically increases your buying power as well. The IRS allows you to defer your capital gain taxes because they view it as simply moving your cost basis from one qualifying property to another.

DETERMINE REPLACEMENT PROPERTY VALUE

It is also important to understand how the underlying math can impact the value of the Replacement Property you desire. Remember, to have a totally tax deferred exchange you need to 1) buy equal or greater than your net selling price 2) move all equity from the old property to the new property, and 3) replace your debt.

USING THE REPLACEMENT VALUE CALCULATOR

The calculator below will help you determine your ideal net purchase price, cash downpayment, and the amount of debt you'll need to have a totally tax deferred transaction.

1031 EXCHANGE QUESTIONS?

Use this form to ask your question or call our trusted 1031 exchange Partner Fyntex at 877-345-1031.