1031 Exchange Rules and FAQ
Almost every kind of real estate is considered like kind and can be exchanged for any other real estate, including vacant land for apartments, a rental house for a shopping center, an office building for a leasehold interest with 30 years or more remaining, as long as you hold them for investment or business use. Check with us on the specific properties.
Yes, you can buy a new property before selling the old property and still qualify – it’s called a reverse exchange. The qualified intermediary takes title to the new property you buy and holds it for you until you sell your old property.
defer all the taxable gain?
withdrawn in accordance with the Regulations. The taxpayer cannot
receive any money until the exchange is complete. If you want to receive
a portion of the proceeds in cash, this must be done before the funds
are deposited with the Qualified Intermediary.
- A Section 1031 exchange is one of the few techniques available to postpone or potentially eliminate taxes due on the sale of qualifying properties.
- By deferring the tax, you have more money available to invest in another property. In effect, you receive an interest free loan from the federal government, in the amount you would have paid in taxes.
- Any gain from depreciation recapture is postponed.
- You can acquire and dispose of properties to reallocate your investment portfolio without paying tax on any gain.
- The value of the replacement property must be equal to or greater than the value of the relinquished property.
- The equity in the replacement property must be equal to or greater than the equity in the relinquished property.
- The debt on the replacement property must be equal to or greater than the debt on the relinquished property.
- All of the net proceeds from the sale of the relinquished property must be used to acquire the replacement property.
Within the qualifying use period, in each of the two 12 month periods, (1) the taxpayer rents the dwelling unit at fair rental to another person for 14 days or more and (2) the taxpayer s personal use of the dwelling unit does not exceed the greater of 14 days or 10 percent of the number of days during the 12 month period that the dwelling unit was rented at fair rental value.
It is owned by the taxpayer for at least 24 months immediately following the exchange ( qualifying use period ); and –
/$500,000 residential tax break?
For example, a taxpayer exchanged into a property through a 1031 exchange and rented it for 4 years. The taxpayer then decides to move into the property, convert its use to primary residence for 2 years then sell the property and realize $250,000 of gain. Under the old law, this gain would be excluded under Section 121. Now, the 121 exclusion is prorated for the periods of time that the property was held for nonqualified use. This means that 4/6 or 4 out of 6 years of gain is ineligible for the $250,000 exclusion.