Frequently Asked Questions about 1031 Exchanges

This is a tough question - the tax could be as much as 37% of the sale price of your property.  It depends on a lot of factors that you may not know at the top of your head, like your basis in the property.  

A very rough estimate would be -- (sales price - what you paid for the property) * 25%

The actual calculation is - ((sales price - closing costs - what you paid for the property - any improvements you have done) * applicable capital gains tax rate) + (any depreciation you have taken * your marginal income tax rate).  As you can imagine - your tax professional may be the only one that can estimate this for you.  It is usually NOT less than 20% of your gain.

Net Sales Price is the total price that you sell your relinquished property for less closing costs.  It is not just your proceeds.  It includes any loans paid off.  Your replacement property should cost at least your proceeds and have at least as much debt as your relinquished property.

This is OK, it's called a partial exchange.  However, it is likely that the full amount you take will be taxable gains called "Boot".

Yes, you can do this.  But keep in mind that the closing of the first property starts the clock and all transactions must be complete in 180-day window.

You can do that.  Normally, you must rent it at full market rent for at least 14 days AND are limited to 14 days of use per year during the 2 years prior to and after the exchange.  If you rent it for more than 140 days, you can use it a little more.  After 2 years, you are allowed to convert the property to personal use.

It is possible to divide the sales price of your personal property and allocate the investment portion to a 1031 exchange - but use caution here - lets talk...

It is possible to divide the sales price of your business and allocate the real estate portion to a 1031 exchange.

The IRS has said that 2 years is ‘safe harbor’. The ultimate question is whether you had the intention of using it as long-term investment property at the time of purchase.

The IRS has said that 2 years is ‘safe harbor’. The ultimate question is whether you had the intention of using it as long-term investment property at the time of purchase.

No problem, you can exchange property from any state (or some US territories) into or out of any other state (or some US territories).

Sorry, here is one place where ‘like-kind’ applies to a 1031 exchange. Domestic property (US and some US territory) is one kind and foreign property is another kind (so – not like-kind).

There are several solutions that work for this:

• Hire property management for your existing, or replacement property.
• Buy property that uses a NNN lease to a high-quality tenant.
• Buy a Delaware Statutory Trust (DST) which is a special type of REIT that qualifies for a 1031 exchange.  But use caution here - a high-quality sponsor is important.

This is possible, but it requires you to have outside cash to 'buy' the note.  If you didn't buy the note with outside money, you will be receiving a replacement property and a note as part of the exchange and the note is not a qualifying 'property'.

You are not allowed to make improvements to property that you already own with exchange funds.

This is possible, but it can get complicated and expensive.  Because you are not allowed to use exchange funds to improve property that you already own - there is a timing challenge.  The easiest way to accomplish this is to get the seller to do the improvements prior to selling it to you.  If that isn't possible, Let's Talk....

The clock starts ticking at midnight the day of closing on the first property transaction in the exchange.  In other words, you have until mid-night on the 45th day after closing to identify the other property(ies) and you have until mid-night the 180th day to close on the last transaction in the exchange.

This is called a Reverse Exchange.  The process is a bit more complicated (and expensive).  The process looks like this:

• We set up a new LLC called an Exchange Accommodation Titleholder (EAT)
• You lend the funds needed to purchase the property to the EAT
• The EAT purchases the replacement property
• The EAT leases the property to you (so you have control of it)
• Within 45 days, you identify the property that you are going to be selling
• Within 180 days, you close on the sale of the relinquished property
• We complete the exchange

Because the 'seller' and 'buyer' in an exchange must be the same taxpayer, we will need to make some changes to the ownership structure prior to the sale.  This could be as simple as converting ownership from joint into "Tenants in Common".  There may be tax considerations with this conversion, but in most cases of joint and LLC ownership there are not.

This can be very difficult and the IRS watches this very carefully, because it has been abused in the past.  This is one we should discuss your particular situation.