1031 Tax Free Exchanges

Forward Exchange:

1. Like-Kind

The relinquished property must be “like-kind” to the replacement property. All  real property is deemed to be “like-kind” with other real property.

2. Investment Intent

In order to qualify for tax deferral treatment, both the relinquished property and the replacement property must be held for investment or for productive use in a trade or business.

3. Qualified Intermediary (“QI”)

In order to qualify for safe harbor tax deferral, exchange proceeds from the sale of the relinquished property must be held by a QI and used for the purchase of replacement property. At no time can the taxpayer have access to the proceeds from the sale of the relinquished property.

4. Exchange Deadlines

In a forward exchange, taxpayers have 45 days from the sale of the relinquished property to identify potential replacement property, and 180 days from the sale to close on, and take title to, properly identified replacement property.

5. Identification Rules

Taxpayers may identify up to three replacement properties of any value during the 45-day identification period, or more than three properties if certain requirements are considered. If you identify more than three, then you will be subject either to the 200% Rule and possibly to the 95% Rule. Learn More

6. Exchange Formula

A simple formula to remember, the value of the replacement property must equal or exceed the net sales price of the relinquished property (the “Total Replacement Value” or TRV), and all of the cash proceeds must be used for the purchase. If this threshold is not reached, the taxpayer must pay tax on the shortfall.

7. Ownership (“Same Taxpayer”) Requirement

The taxpayer that sells the relinquished property must be the same taxpayer that acquires the replacement property (NOTE: taxpayer may use a single-member LLC of which it is the sole member as a disregarded entity to purchase the replacement property). Learn More

Qualifying property:

Does my property qualify for exchange?

Real property held for productive use in a business or trade, or for investment, qualifies for exchange (this is called the qualified use requirement). Your primary residence does not qualify and neither does property held primarily for sale and accounted for as inventory. So, if you purchased a property and are planning to flip it, the property does not meet the qualified use requirement and the transaction will not qualify for tax deferral under 1031.
However, an investment property you have owned for longer than the two-year period immediately preceding the sale will.

What about personal residences?

Typically, a taxpayer’s primary residence does not qualify for 1031 exchange treatment. There are, however, various exceptions to this general rule.

What about second homes and vacation homes?

Generally, a taxpayer’s second home or vacation home does not qualify for 1031 exchange treatment since “personal use” property does not meet the held for investment or held for use in a productive trade or business requirement. Also, the taxpayer will not be eligible for the personal residence exclusion under IRS Code Section 121 as noted above.
A property is generally considered to be a second home if the taxpayer uses the property for personal purposes for a number of days which exceeds the greater of 14 days or 10% of the number of days during the year for which the property is rented at a fair market value.

Learn more about exchanges:

What is a 1031 Exchange?

Section 1031 of the U.S. tax code allows for the deferral of capital gain tax resulting from the sale of certain qualified real property, so long as all of the value of the sold (relinquished) property is used to purchase like-kind real property of equal or greater value to replace it.  Learn More

What is a QI?

A QI is a functionary that converts the sale and acquisition of qualified like-kind real property from a taxable event to a tax-deferred exchange by ensuring the transaction conforms to IRS regulations. A QI is sometimes referred to as an intermediary, facilitator, accommodator, or qualified escrow holder. Nearly all exchange types require the services of a QI like SEA1031.  Learn More

What does a QI do?

As your QI, we will prepare the required exchange documents and work closely with your closing agents for the sale and purchase of your exchange properties. We will open a segregated bank account to hold the proceeds from your relinquished sale (your exchange funds) and will use them only for the purchase of replacement property for your exchange.  Learn More

What does a QI NOT do?

A QI is not your accountant or attorney and therefore is not qualified to give accounting, tax, legal, or investment advice, and, further, cannot act in an agency capacity on your behalf. Although we will assist with executing your 1031 exchange transaction, as a QI we must be a disinterested party in it. Learn More

Exchange Type:

FORWARD EXCHANGE

If you are selling your relinquished property first, and then buying another property to replace it.

REVERSE EXCHANGE

If you are purchasing replacement property first, and then selling your relinquished property afterward.

CONSTRUCTION EXCHANGE

If you are using exchange funds to build improvements on property you purchase in the exchange. A construction exchange can be a forward exchange or a reverse exchange.

CONSTRUCTION LEASEHOLD EXCHANGE

If you are using exchange funds to build on property you or a related party already owns. A construction leasehold exchange can be a forward exchange or a reverse exchange.