1031 Exchange FAQ
Section 1031 of the Internal Revenue code allows you to defer the payment of taxes on gain realized on the sale of investment property if you reinvest in another investment property.
Also known as a tax deferred exchange, delayed exchange, and other terms, is described under Internal Revenue Code Section 1031. It allows you, the investor the opportunity to defer capital gains taxes owed upon the sale of investment or income producing property by exchanging the property for other like-kind property. The IRS has specific guidelines that must be adhered to for the transactions to qualify and a Qualified Intermediary must be a part of the closing to achieve a safe harbor exchange.
- When considering the sale of real estate that has been held as investment (i.e., long term appreciation) or production of income (i.e., rental, farming, etc.).
- You are selling property that was inherited and it has since appreciated over time.
- You would like to sell to geographically relocate investment property.
- You plan to consolidate multiple investment properties into a single larger property or Diversify your real estate portfolio by selling a single large property to purchase multiple investment properties.
- A business has outgrown a location or is downsizing.
- Estate planning
A Qualified Intermediary (“QI”) is a professional company that specializes in processing Section 1031 exchanges. Under the IRS guidelines, the QI acts to facilitate the transfer of the properties. The QI is hired prior to closing to prepare exchange documentation that must be a part of the closing and sets up a qualified escrow account to hold the sale proceeds during the time between the sale of the existing property (Relinquished Property) and the acquisition of the new property (Replacement Property). The law requires the proceeds from the sale of the existing property be kept from your (the seller/taxpayer) control until a suitable Replacement Property is identified and ultimately purchased and transferred to you by the QI.
WARNING: You must select a QI to facilitate the exchange prior to closing on the sale of your existing property. Waiting until after the closing will be too late!
When it comes down to making your decision, you should select a QI based on its expertise, experience, integrity, and years in the exchange business. Starker Services, Inc. (“SSI”) is the nation’s oldest and most experienced independently owned Qualified Intermediary firm. SSI facilitates thousands of exchanges each year and has been doing so for almost three decades!
One of the main responsibilities of the Qualified Intermediary is to provide the accurate documentation required by the IRS for the defensibility of the exchange. In addition to this, the QI should provide a level of security in the handling of the sales/exchange proceeds during the exchange process.
Personalized customer service and knowing that you can reach an exchange specialist when you have questions is key to your satisfaction. You can always reach one of the Starker Services team when you need them.
For property to qualify as “like-kind”, it must be held for investment (i.e., appreciation) or for production of income in a trade or business. Like-kind is a very broad definition, for example, you can sell a residential rental and buy a commercial property, sell land and buy a multi-family or apartment building. However, a primary residence or personal use property like a second home does not qualify as 1031 like-kind property. Though at times a second home/vacation rental may qualify if the personal use is limited and there has been some rental income. Contact us for more information.
The IRS requires you to identify in writing your potential replacement properties within 45-days of the sale closing date. You must also complete the exchange, receive ownership of your new property within 180-days of the sale closing date. A professional qualified intermediary will provide guidance on the identification rules and the forms needed for identification of the replacement property.
To receive the benefits of tax deferral you will be reporting your 1031 exchange to the IRS for the year of the sale (IRS form 8824). It is the taxpayer/owner of the property who reports the property that must receive ownership of the new property. For tax reporting purposes the IRS knows us by our taxpayer ID number (Social Security Number, TIN). If a property is held in the name of an individual it is the same individual that must take title to the replacement property; if owned by a corporation then, the same corporation must take title. For questions on ownership issues, please contact us.