WHY IS IRC §1031 IMPORTANT TO ME?
IRC §1031 allows you to defer capital gain tax when you sell
real property used for business or investment purposes, and
purchase like-kind property. A §1031 exchange will defer
depreciation recapture provided the replacement property is
also improved real property.
WHAT KIND OF PROPERTY CAN I BUY TO
REPLACE WHAT I AM SELLING?
Under §1031 all real estate is considered to be like-kind with
all other real estate, as long as both the properties sold and
purchased are used for investment or business purposes. So,
a primary residence or vacation home cannot be used in a
§1031 exchange, but single-family rental homes, condos,
commercial property, farm land, bare land and any other
interest in real estate that is held for business or appreciation,
and is located in the United States, is like-kind and can
be exchanged. You can also buy and sell multiple properties
within one exchange.
HOW MUCH DO I NEED TO INVEST IN THE
In order to defer all capital gain, your net purchase price must
be greater than your net sales price. As an example, a property
sold for $800,000 may have a net sales price of
$750,000 after commissions and other qualified closing
costs. A purchase of at least $750,000 is required to defer all
capital gain tax. If you buy a property of lower value than you
sold, you will be liable for taxes on the difference (this is
known as “boot”). In addition, all the equity (proceeds) must
be used towards the replacement property(ies). Any proceeds
left over after the exchange is completed are also boot.
WHAT ARE THE KEY STEPS INVOLVED IN A
The §1031 regulations require you to use a Qualified
Intermediary (“QI”), also known as accommodator or facilitator,
in §1031 exchanges. The QI must be assigned into the
contract on the property you are selling before escrow closes.
Once escrow closes, the QI will hold the proceeds from
the sale of the property. These proceeds are restricted for
certain periods. You may withdraw proceeds before funds
are sent to the QI, but withdrawals will be boot.
From the date escrow closes, there are two statutory timelines.
You have 45 calendar days to identify property you are
going to purchase and 180 calendar days to close on your
replacement property. There are no extensions for weekends
or holidays. If the 45th day falls on a Sunday, that is your
deadline to identify. When identifying property, you can use
either the 3-property rule (you identify up to 3 properties
regardless of their value) or the 200-percent rule (you identify
as many properties as you want up to an aggregate fair
market value of 2 times what you sold).
WHO IS THIS “STRANGER” THAT IS GOING TO
HOLD MY MONEY?
You need to be sure that your money is secure since all
Qualified Intermediaries are not created equal. Here are
some important questions to ask any QI before you hand
them your money:
• How long have they been in business?
• Are they bonded, and what is the size of the bond?
• Do they have errors & omissions insurance coverage?
• Do they have a written guarantee that my money will be
there when I need it to purchase my replacement property?