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What are the 1031 exchange rules?
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1031 Exchange FAQs

Who is 1031X?

1031X is a “qualified intermediary,” which means that we facilitate 1031 exchanges.

By hiring 1031X, investors who sell real estate can save money and grow their wealth.

After 28 years in the business, our clients have processed $2.5+ billion in successful 1031 exchanges nationwide.

What is a 1031 Exchange and how does it work?

A 1031 Exchange (or “like-kind exchange”) allows real estate investors to defer their capital gains taxes (and other income taxes) when selling a property. Investors must reinvest in another qualified asset. The strategy comes from Section 1031 of the Internal Revenue Code.

In other words:

A 1031 exchange is an asset-swap that goes unrecognized for tax purposes.

In practice, you need a Qualified Intermediary (such as 1031X) to step in and create legal distance between you and your sale. This way the IRS will recognize your transaction as an “exchange” rather than a “sale” for tax purposes.

How do I start an exchange?

You should speak with an experienced 1031 exchange coordinator. The details of your potential exchange help determine which strategy is best for you.

We always offer a free consultation at (303) 504-0144, by email, or by video conference.

Please note that a qualified intermediary cannot provide specific legal or tax advice.

How can I defer ALL of my taxes from the sale of my property?

By following two rules.

(1) Make sure your replacement property(ies) have an equal or greater net sales price.

(2) Transfer all of your net equity into the new property(ies) as a down payment.

How long do I have to hold a 1031 exchange property?

There is no strict rule here. The IRS cares more about your intent to hold and treat the property for investment. Time is a factor that the IRS may consider when determining if a taxpayer legitimately intended to hold the asset for investment.

How long do I have to buy a replacement property?

After the close on the sale of your relinquished property, you have a maximum of 180 calendar days, or your tax filing date, whichever is earlier, to buy your replacement property(ies).

Remember that you must also correctly identify your potential replacement properties within 45 calendar days from the close of the relinquished property.

Do I qualify for a 1031 exchange?

To qualify for a 1031 exchange, you must sell property held “for investment or use in trade or business” and then you must reinvest into another asset with the intent to also hold that for investment or business use.

This can be an ambiguous and even subjective topic. If you have questions, please contact us directly.

Who holds my sale proceeds? Is this safe?

We do not hold your sale proceeds; rather, we partner with FDIC-insured banks who will open an individual escrow account for you. The account is set up in your name and no 1031 funds may move in or out of the escrow account without your written and verbal authorization.

What is a “qualified intermediary”?

A qualified intermediary, or 1031 Accommodator, helps coordinate and process 1031 exchanges.

The rules and requirements are set forth by U.S. Treasury Reg. §1.1031(k)-1(g)(4).

The QI helps transfer the relinquished (sale) and replacement (purchase) properties; it also establishes escrow accounts for the securing of 1031 proceeds.

1031x.com, Inc has been a qualified intermediary for more than 25 years!

Can someone email me or call me? I have questions about my specific situation.

We always offer a free consultation at (303) 504-0144, by email, or video conference. Click here to tell us how and when we should contact you.

Can I exchange my primary residence?

Unfortunately, no. The IRS does not consider your primary residence to be an investment asset for 1031 purposes.

Can I exchange my vacation home?

Vacation homes do not qualify for 1031 treatment.

You are able to exchange a property at which you spend personal time, but the personal time may not exceed 10% of the total days the asset was rented out or 15 days, whichever is less. Learn more about other 1031 rules here.

What qualifies as 1031 replacement property?

You can 1031 exchange any property held for investment or business purposes. All properties that fall into these categories are considered “like-kind” in an exchange.

How do I identify my replacement properties?

After the close on your relinquished property, you have 45 calendar days to identify potential replacement assets. Within than identification period, you must submit a written document to your 1031 qualified intermediary with a list of potential purchase addresses.

We will provide an electronic form that you can use an update at any time before the end of your identification window.

What is “boot”?

“Boot” refers to the receipt of taxable assets in violation of IRS rules.

If you directly receive and take possession of any proceeds of your sale, those proceeds become taxable and may no longer be deferred in the exchange (“cash boot”). If you use all of your proceeds but fail to trade equal or greater in net sales price, the difference in net sales price becomes taxable (sometimes called “mortgage boot”).

What does “like-kind” mean?

It simply means that a property is used productively in a business or is otherwise held for investment.

The IRS is fairly liberal with its definition of like-kind real estate. Single-family and multi-family are like kind. Commercial and residential can be like-kind. The definition even covers unimproved land and mineral rights. If you have questions about a specific property you want to buy or sell in a 1031 exchange, click here to contact our coordinators.

Can I sell or buy more than one property in a single 1031 exchange?

Yes!

You can buy or sell partial properties, single properties, or multiple properties in the same exchange.

Keep in mind that all activity in a single exchange must still comply with the 45-day and 180-day rules — as well as identification rules — no matter how many assets are involved.

Can I pay for closing costs with my exchange funds?

It depends.

Some selling expenses and closing costs may be paid for with 1031 exchange proceeds; other costs must be paid for with after-tax funds. Examples of items that your proceeds may pay for include title insurance premiums, escrow fees, referral fees, qualified intermediary fees, recording fees, and broker commissions.

You may never use 1031 proceeds to pay for lender fees, prorated taxes or rents, security deposits, or repairs/maintenance. Any proceeds used for these purposes will become taxable.