Six Rules of a 1031 Exchange
Tracey Wilson with FNF1031 is an expert in the field of tax-deferred like-kind (1031) exchanges. With a background in investment banking and corporate finance, he has assisted clients through many unique situations. Below are his tried and true 6 rules for a 1031 tax-deferred exchange.
Six Rules of a 1031 Tax-Deferred Exchange
#1 Both the “Old” property and the “New” property must qualify.
Generally speaking, the client must have owned the Old property for at least one whole year and a day, and the client must plan on owning the New property for at least a one year and a day as well (2 years of tax returns for both properties). The client must treat the Old (and the New) property as an investment or it must be used to produce income.
#2 45 (calendar) days to simply identify New possible property(ies).
The exchange starts on the date the client closes on the sale of the Old Property — not when the property goes under contract or receives an earnest money check. The Qualified Intermediary (QI) and the required IRS Exchange documents must be at the closing table when the Old Property closes. The client can identify up to three properties (there is a way to ID more, but please contact Tracey for details), and they must be specific properties, in writing, signed, and turned into the QI no later than midnight of the 45th day.
#3 Must close within180 days (not just ‘close-in-escrow’) on one or more of the identified properties.
Both the 45-Day ID period and the 180-Day Exchange period start on the same date — the closing date of the first sale — so the periods run concurrently.
#4 The IRS mandates that the client use a Qualified Intermediary or QI (sometimes also called an Accommodator).
Client cannot use their attorney, or their accountant, or their Realtor, or their best friend, etc. if they have done ANY work, directly or indirectly, for the client within the most recent two years. The client cannot touch the money during the exchange: the QI is required to hold the client’s sales or exchange proceeds during the exchange – until the client is ready to close on their New property(ies).
#5 The client must close and take title to the New property(ies) exactly as they held title to the Old property.
There are some “exceptions”, such as disregarded entities like Single-Member LLCs, or certain Trusts, or in specialized Partnership situations. Please consult with your QI for further details.
#6 To have zero tax implications, the client must buy property(ies) that are equal-or-higher in value than the Old property…AND, must reinvest all the cash proceeds in the New property(ies).
The client can buy down in value on the New property(ies), but will have tax implications on the amount of the buy-down (called ‘boot’). The client can choose to keep some or all the sales/exchange proceeds and complete the exchange, but again there will be a tax consequence. The client does not have to replace the debt on the Old property with an equal amount of debt on the New property.
Tracey Wilson is a wealth of knowledge when it comes to 1031 tax-deferred exchanges. Please contact him at 877.775.1031 or TraceyCWilson@fnf.com. Look for future blogs from Tracey, too!
February 16th, 2010 at 3:45 pm
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