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6 Rules for 1031 tax deferred exchanges

An AR friend called me today asking about 1031 exchanges. She knew that we do a lot of them as we are in an area with a lot of rental properties. Her call reminded me that I had written a couple of posts about them on my outside blog, and thought that I should post them here too. Money

When buying or selling certain properties, you can defer the taxes on the gain by doing a 1031 exchange. When you sell one property and buy another, it is possible to defer all taxes on the gain if you follow these six rules to meet the stringent IRS regulations.

The IRS Rules for Exchanges

Qualified Intermediary (QI). The IRS mandates that you use a QI to prepare the legal documents for your exchange. Because the QI must be independent, it cannot be your friend, employee, broker, or even your accountant or attorney. The QI also holds your money, so that you do not have access to it.
Proper title holding. You must purchase and take title to your new property exactly as you held title to your old property.
Reinvestment Requirement. To defer all of your capital gain tax, you must buy a property equal or higher in value than the one you sold. Also, you must reinvest all of the cash proceeds from your sale and the loan amount must be the same or more.
Real Property Use. Both your old and new properties must qualify as investment or business use. If both properties pass this test, you can exchange nearly any type of real estate. Read more about a recent court ruling on 1031 exchange treatment of vacation properties.
45 Day Identification Period. You have 45 days from the closing of your sale to identify the properties you may want to buy. There are no exceptions to the deadline.
180 Day Exchange Period. From the sale closing date, you have 180 days to close on the purchase of one or more properties from the 45-day list. Again, there are no exceptions to this deadline. Miss a deadline and pay the taxes. The IRS is not very forgiving!

Courtesy of The 1031 Exchange experts.

One other item that not everyone is aware of is that your clients can sell one property and buy two more with the proceeds! They are not limited to one property only.

Another AR posts I wrote on 1031 exchanges tells how a Breckenridge attorney acting as an intermediary disappeared, allegedly with the money! Take care in giving clients names of companies and make sure that they understand that they are not regulated yet!

Photo by Thomas Hawk on www.flickr.com

Posted by Summit County, Colorado Realtor l Joanne Hanson on 09/22/2007 12:46 AM

Comments (30)

1031 exchange

This post has been included in Colorado Information Summit County, CO Information

30 Comments on 6 Rules for 1031 tax deferred exchanges

SEP

2007

Nice post on 1031. Thanks for pulling this together and sharing.

Thanks Bob and Carolin, It is easy, but sounds difficult!

Joanne - I am amazed at the agents here that do not understand these guidlines - they are so important when over 80% of your homes are purchased or sold as a 1031 -

Joanne great information. I don't see too many 1031 here but it is good to know about them when they happen.

Joanne - great information. The 1031 I see seem to happen towards the end of the year, I guess these are the people who waited until the very end and is in a panic. Usually a hear phrase such as: 'I must find a property in a week."

I've done a few 1039 Exchanges, there is a title company in Ann Arbor that is very good and putting them together for my clients so no worries. It is definately a option Realtors should know how to share with their clients.

Very informative and helpful post for the consumer, Joanne. I'm sure many folks will appreciate the information you've provided here. ((-:

Joanne..thank you...I don't have time to go and take classes on this stuff..but since Ihave joined AR...I have gotten so much information I really don't need to...

JoAnne - Scary that an attorney would disappeae with the money. I think I would reccomend a reputable company rather than an individual. Make that three reputable companies! :) Clients also need to know and be aware of the time limitations. Good Post!

Thesa, are your numbers 80%? That is a lot! I don't think we have that many as so many people use them as second homes only, not rentals, and in that case they don't qualify for a 1031.

Ashley, a lot of commercial Realtors use them too, because any property generating rental income qualifies as an investment property.

Hi Jennifer, they are often in a hurry because of the time deadlines. It really puts them at a disadvantage if the Seller knows about it.

Missy, many of the title companies here have branches that will handle the 1031 paperwork. It makes it much easier if we can get both transactions to close there as well.

Jo, I hadn't though about Canada! I am sure you have a whole different scenario. I heard yesterday that the Canadian $ and the US$ are now worth the same as each other for the first time ever!

Konnie, there is much more to it than just these quick paragraphs. I still have to take a 1031 online class before the end of the year! That is a great way to get the CE credits and the information, yet not take the time out of the day. It just takes time away from blogging ;-)

Paula, there was big company that went out of business recently too! That affected even more people. That part of the industry really needs some regulation.

Joanne, this gives a very nice summary of the 1031 Exchange process. It may sound confusing, but it is a very good idea for investors. Thanks for the great post.

Joanne, this is fantastic information on 1031's and something that I definitely need to learn more about. Thanks for all of the great info!!

Chrissy, Investors LOVE the 1031 exchange! Anything that defers taxes is usually pretty good. We are getting a few people now who say that the long term capital gains tax isn't so bad, and they will go ahead and pay it, but it usually is when they haven't owned it for a long time.

Stephanie, money is green, so it should fit right into your environment! ;-)

Joanne,

I haven't done one of these before but enjoyed reading the information. I'll have to remember this for when I need to use it.

Hi Rita, it is a fantastic way to help your clients same money by deferring taxes. When you ask if they are going to do one (on an investment property) they already think you are an expert!

SEP

2007

Joanne, I have never had to represent a seller in a 1031, but my buyers have bought homes where the sellers where doing a 1031 exchange. This is a great post I sure will refer to it later on.

SEP

2007

Hi Mana, it is great information to have at your fingertips. You never know when you will need it.

thank goodness the PROFESSIONALS in this line of work are readily available because some of these "rules" get confusing! Good Post Joanne!!

Great information to present to investors. I agree with Susie, the rules get confusing . I have done 1031s for myself as well as for clients but always refer them to a specialist.

Susie, Professionals are what we need for everything! From loans to title to 1031s...and of course for real estate!

Gita, another name for Professionals is specialists and I am sure that your Bucks County PA buyers and Sellers appreciate your great referrals.

SEP

2007

Joanne, I have taken a couple of classes for CE credit and I had understood that you only had to reinvest the amount of money you would have been taxed on (capital gains), not necessarily all of the proceeds from the sale (#3). I have not had the opportunity of being involve in a transaction that will require doing a 1031 exchange, but I remember from those classes that if the property is a vacation home there is also an amount of time the home must be used for rental and a maximum amount of time to be used by the owner. Also, this is not supposed to be used if you are going to flip a house in less than 1 year and 1 day. There are many rules and regulations when it comes to 1031, you should always try to use an attorney to handle it for you, just make sure that he is not going to run away with your money.

OCT

2007

Carmen, it is always best to have an expert on board. I just need to know enough to know where to direct them, and I let the expert go from there. With a 1031 they have to use an intermediary, so that person should have the details.

OCT

2007

Joanne,

IRS is indeed strict with those deadline dates, 45 and 180. Those who don't fully appreciate these deadlines are usually sorry when they pass. I was unaware that you can buy two or more properties with the sale proceeds. Great primer for anyone interested in doing one of these.

Thanks Esko. The IRS isn't very forgiving, so people need to be sure and abide by the dates!

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