Dennis and I went to a seminar on 1031 Tax Exchanges this evening. It was sponsored by the Des Peres Keller Williams office. The material was presented by Coleen Howell, a Vice President with LandAmerica-Commonwealth Title Company. As we are considering moving up from our two-families to larger investment properties in the future, I thought it would be a good idea to attend. The class was pretty general, for beginners, which was fine with me; I don't know that much about the exchanges. I also wanted to educate myself so I could better assist my investment property clients. Some notes I took tonight are as follows:
Straight Deferred Exchange:
Your relinquished property begins the 1031 Tax Exchange.
The property(s) you purchase ends your 1031 Tax Exchange.
A qualified intermediary (title company) holds the funds.
You, the purchaser/taxpayer can have no control over the funds. The money goes into a 1031 Account; it does not go into your hands.
Timeframes must be strictly followed. You have 45 days from closing to identify your new property(s). These are calendar days, not business days.
There are 3 rules for the exchange:
1. 3 Property Rule - When you sell a property, you can identify up to 3 properties to purchase. Most exchanges fall into this category.
2. 200% Rule - Can buy as many properties as you wish, as long as the market value of the purchased properties do not exceed 200% of the sold price on your relinquished property.
3. 95% Rule - Not used much - You can identify as many properties to purchase as you wish, but you must close on 95% of them to qualify.
The property you identify must be specifically identified. You must purchase with the intent to hold for investment. You cannot use the exchange if you are flipping a property (have rehabbed it to sell); this is considered "inventory".
They also touched on Reverse Exchanges, but that was really confusing. I did learn I need to do more research in these exchanges. They did say we must always direct our clients to their tax advisor or attorney to make sure the 1031 Tax Exchange is the correct avenue for them to take.