What is a 1031 Exchange, and how can it help me to succeed?

Real Estate Agent with Keller Williams Realty Inc. TREC# 595370

If you are a recent real estate investor, you have probably heard about a lot of terminology that applies to the industry. As is the common saying, if you want to become an expert at something, you should first learn and memorize all of the acronyms and abbreviations that industry uses. This blog post will be the first in a series of blogs that are designed to educate a new real estate investor, particularly one whose investment strategy is to buy and hold.

What is a 1031 Exchange?

A 1031 exchange is an IRS tax term that allows an investor to sell an asset for another like-kind asset through an intermediary and defer paying capital gains taxes on the profits. The replacement asset(s) must be indentified within 45 days and at least one of those must close within 180 days after the original asset sold. Qualifying assets must be held for at least a year. However, the IRS looks favorably on assets that are held for at least two years prior to exchanging.

What assets qualify for like-kind asset exchange?

DuplexesAn like-kind asset refers to selling one class of asset and exchanging it for another of the same class. For example, an investor currently owns several small multifamily properties such as duplexes and quadraplexes.  They wish to sell all of them in order to consolidate their portfolio into one large multifamily property. They could use a 1031 Exchange to hold the profits from the small multi-family properties and apply that to the larger property.


Raw Land

Another example is that an investor currently owns land that currently used for grazing. They wish to sell the land and use the proceeds to buy a multi-family property. A 1031 Exchange is useful in this situation also. 

However, if said investor currently owns real estate and wishes to cash out of real estate in order to start a boat rental business, then they could not a use a 1031 Exchange to facilitate that. 1031 Exchanges can only be used to swap real estate with other real estate, vehicles with other vehicles, and airplanes with other airplanes.

 Photo Credit Wikimedia Commons

How to use a 1031 Exchange

  1. Find a reliable and trustworthy intermediary. Title companies are a great place to start as this is a service that many offer. Another resource is to check with a local REALTOR© that specializes in investment properties. Please do your due diligence to find a reputable intermediary as there are many horror stories of fraudulent vendors!

  2. Sell the original asset(s). An intermediary typically charges about $750 to facilitate the transfer of the proceeds in to an escrow account. They hold the proceeds of the sale amount in escrow account until the new properties are located. The IRS is notified of the sale through a 1099 from the title company involved in the transaction. 

  3. Notify the intermediary of the intent to locate another qualifying asset(s).

  4. One or more replacement assets must be located and reported to the intermediary within 45 days after the original sells. If this limit is exceeded, then the investor is responsible for capital gains taxes on the original assets.

  5. Purchase and close on the new assets. This must be done within 180 days of the original sale, or the investor is responsible for capital gains taxes from the original asset. The intermediary typically charges $250 to handle this. 
  6. Repeat as often as needed!

Using these strategies as outlined above can help to defer the capital gains taxes indefinitely and are good strategies to use in order to maximize the available capital for investing.

For another great resource on this topic, please visit http://www.atlas1031.com/

If you would like to know more information about 1031 Exchanges or have any other questions about acquiring investment properties in the Austin Area, please contact me at 512-693-9297 or at jordan.gouger@kw.com


Re-Blogged 5 times:

Re-Blogged By Re-Blogged At
  1. Elise Harron 09/09/2013 11:43 AM
  2. Eileen Burns 09/09/2013 11:14 PM
  3. Gene Riemenschneider 09/10/2013 02:08 AM
  4. Bob Crane 09/15/2013 10:08 AM
  5. Winston Heverly 11/28/2013 10:02 PM
ActiveRain Community
1031 exchange
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AJ Heidmann ~ CRS
McEnearney Associates, Inc. - Alexandria, VA
YOUR Alexandria & Arlington, VA Real Estate Expert

Jordan - As a CRS instructor explained to me years ago... defer, defer, defer, defer, die... your heirs get the stepup cost basis in the property.  It's hard core but it beats the tax man, thanks for the posting.

Sep 09, 2013 01:22 PM #26
Praful Thakkar
LAER Realty Partners - Andover, MA
Andover, MA: Andover Luxury Homes For Sale

Jordan, you made it very simple - as I had attended few training sessions on the same and thought this to be one of the most complicated topic!

Sep 09, 2013 02:25 PM #27
Barbara Tattersall
Keller Williams Realty Metropolitan (Keene,NH) - Keene, NH

I think the hardest part of the 1031 is finding the qualified intermediary. I personally was dabbling with the idea of doing that on one of my properties but the local attorneys I spoke with were not interested.  Never thought about the title companies.  Thanks for the tip.

Sep 09, 2013 09:29 PM #28
Missy Caulk
Missy Caulk TEAM - Ann Arbor, MI
Savvy Realtor - Ann Arbor Real Estate

I use one title company in Ann Arbor when I have an investor looking at 1031 exchanges. They totally understand the concept and are great. 

Sep 09, 2013 09:32 PM #29
Jeff Pearl
RE/MAX Distinctive / LIC in VA - Lovettsville, VA
Full Service Full Time Realtor

Just complteed a 1031. I think they are more popular than many people think. They can also be frustrating when the client can't make up their mind about what replacement property to buy. We identified one on 44th day.

Sep 09, 2013 09:33 PM #30
Jill Sackler
Charles Rutenberg Realty Inc. 516-575-7500 - Long Beach, NY
LI South Shore Real Estate - Broker Associate

This is a very informative and useful post. I haven't had the opportunity to do one yet.

Sep 09, 2013 09:54 PM #31
Drick Ward
NEPTUNE REALTY - Virginia Beach, VA
"RealtorDrick" - Experienced Representation

Valuable blog!

Sep 09, 2013 11:31 PM #32
Travis "the SOLD man" Parker; Associate Broker
Team Linda Simmons, Enterprise, AL 36330 - Enterprise, AL
email: Travis@theSOLDman.me / cell: 334-494-7846

I thought I was going to have the swap properties type a few months ago and couldn't find anyone around here who knew what to do. This info will help if it comes up again. THANKS!

Sep 10, 2013 12:09 AM #33
Andrew Gustafson
Atlas 1031 Exchange, LLC - Fort Walton Beach, FL
Certified Exchange Specialist

A Qualified Intermediary does not report the exchange to the IRS. Escrow or the title company files the 1099 with the IRS. Be careful with asking your title company to accommodate the 1031 exchange given that may not be their specialty. Rather locate a Certified Exchange Specialist© and Federation of Exchange Accommodator member at http://bit.ly/16hFtus in your area.

Nine states have legislated regulations Qualified Intermediaries must follow or face civil/criminal penalties. Those states include Washington, Oregon, California, Nevada, Idaho, Colorado, Virginia, Maine and Conneticut.

Learn four questions that experienced investors ask a Qualified Intermediary prior to engaging at http://bit.ly/13GGFqn. Know what to ask.

Sep 10, 2013 01:15 AM #34
Jack O'Neal
Conway Real Estate - Gilbert, AZ

I have done several, the Key issues have a professional tax person for the exchange, to look at the issues.

Sep 10, 2013 01:26 AM #35
Bob Miller
Keller Williams Cornerstone Realty - Ocala, FL
The Ocala Dream Team

Hi Jordan, well written and educational post.  A topic not seen here often.

Sep 10, 2013 01:44 AM #36
Gene Riemenschneider
Home Point Real Estate - Brentwood, CA
Turning Houses into Homes

I do a lot of Investing Business and this is probably one of the best/short 1031 lessons I have seen.  

Sep 10, 2013 01:57 AM #37
Liane Thomas -Top Listing Agent
BROKER Allison James Estates & Homes BRE 01885684 - Corona, CA
Bringing you Home!

There is a good niche for agents savvy with 1031's. So many agents shy away, yet they are very easy transactions.

Sep 10, 2013 02:13 AM #38
Bob Crane
Woodland Management Service / Woodland Real Estate, Keller Williams fox cities - Stevens Point, WI
Forestland Experts! 715-204-9671

Great job of explaining this sometimes intimidating procedure.

Sep 10, 2013 04:48 AM #39
Jordan Gouger
Keller Williams Realty Inc. - Austin, TX
Helping you to achieve your housing goals!

Thank you everyone for all of the comments! 

Also, thank you to Andrew Gustafson for pointing out the things that were incorrect. Please visit his website as he has a full write up about 1031s. This one is a particularly interesting article about using a 1031 on prize-winning bulls. http://www.atlas1031.com/blog/1031-exchange/bid/67682/1031-Exchange-Livestock-Top-Breeding-Bulls

Sep 10, 2013 06:31 AM #40
Dörte Engel
RE/MAX Leading Edge - Bowie, MD
ABC - Annapolis, Bowie, Crofton & rest of Maryland

Dear Jordan,

Once I had a client, who did not get either of three identified properties, so now I try to get the home under contract before settling on the original one, so you do not get burned.

Sep 10, 2013 07:51 AM #41
Jan Green
Value Added Service, 602-620-2699 - Scottsdale, AZ
HomeSmart Elite Group, REALTOR®, EcoBroker, GREEN

Great job and use of a title!  I'm sure you'll get some hits online from that title.  Great information, too. Best of luck!

Sep 10, 2013 12:01 PM #42
Sharon Parisi
United Real Estate Dallas - Dallas, TX
Dallas Homes

Jordan, you have done an excellent job explaining the value of a 1031 exchange.  Thanks for writing this infomative post!

Sep 11, 2013 02:01 PM #43
DeeDee Riley
Lyon Real Estate - El Dorado Hills CA - El Dorado Hills, CA
Realtor - El Dorado Hills & the Surrounding Areas

Great information Jordon!  I was thinking about a 1031 exchange for my son who is in the military but I don't know if he will have much profit to show on his house yet so for now it is a rental!

Sep 25, 2013 09:37 AM #44
Jordan Gouger
Keller Williams Realty Inc. - Austin, TX
Helping you to achieve your housing goals!

DeeDee - Thank you!

Check with Andy Gustafson with Atlas 1031 Exchange to see if your son's situation might be right for a 1031. His web site is http://www.atlas1031.com/

Sep 25, 2013 10:26 AM #45
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