What is a 1031 Exchange?

A strategy to defer capital gains tax.

Section 1031 of the tax code allows owners of qualified real estate to sell the property without paying taxes on the gain from the sale, as long as the sale proceeds or exchange value is used to acquire like-kind replacement property for investment or business use.

To realize the benefits of a 1031 Exchange, a property owner generally employs the service of a Qualified Intermediary (QI).

We are proud to offer you Qualified Intermediary services to help you navigate this complex process.

Interested?

Send us a message at 1031@kootenaititle.com for any questions about the process or if you’d like to get started!

The Process

SELL

Relinquished Property

  • Execute a sales contract on your relinquished property, mention the 1031 exchange within the contract to notify the buyer of your intent to do a 1031 Exchange.
  • Provide Qualified Intermediary (QI) contact information to your closing agent.
  • Upon the close of the relinquished property sale the proceeds will be wired to the QI on your behalf until you purchase your replacement property.
  • Your 45-day and 180-day periods start the day of the close.

ID

Identify Replacement Property

  • You have 45 days from the close of your relinquished property to identify your replacement property(ies).
  • There are 3 rules in which you can properly identify replacement properties: 3-property rule, 200% rule, and 95% rule.
  • In order to defer all taxes, the value of the replacement property(ies) must be equal or greater than the value of the sale of your relinquished property.

BUY

Replacement Property

  • You can use exchange funds to close on a replacement property at any time during the 180-day period, mention the 1031 exchange within the contract to notify the seller of your intent to do a 1031 exchange.
  • Provide QI contact information to your closing agent.
  • Your closing agent will work with the QI team to draft or obtain all necessary documents.
  • At closing of your replacement property or at the expiration of the 180-day period, your exchange will close and any remaining funds will be disbursed back to you.

What kind of property is eligible?

Nearly all real property held for business or investment purposes is considered to be ‘like-kind’ to all other real property. The following types of real property are often exchanged with taxes deferred:

  • Single or multi-family rental properties
  • Office buildings
  • Apartment buildings
  • Shopping centers
  • Farm and ranch land
  • Vacant land held for investment
  • Billboard sites
  • Hotels and motels
  • Cell tower sites and easements
  • Mineral, oil, and gas rights
  • Water and timber rights
  • Wind farms
  • Warehouses
  • and more!

FAQ’s

A Qualified Intermediary, or QI, is an unrelated third party used to facilitate the 1031 exchange transaction.

Yes, you are allowed to exchange multiple properties. You can relinquish multiple properties for one replacement property, or vice-versa you can exchange one relinquished property for multiple replacement properties. The key is you want your replacement property(ies) to be equal or greater in value than your relinquished property(ies) to avoid taxable boot.

Yes, with few exceptions, the title to the replacement property must be in the same name, or entity, as the relinquished property was held.

While there is nothing in the Regulations on this question, for technical reasons it is considered bad practice to refinance in anticipation of entering an exchange. Refinancing after an exchange to pull some equity out is considered proper.

Yes, as long as your exchange is structured properly. The best method to accomplish this is to have a Special Purpose Entity acquire title to the replacement property, the Special Purpose Entity will complete the improvements and then you, as the exchanger, will acquire the replacement property from the Special Purpose Entity through a built-to-suit or improvement exchange.

A reverse exchange is an exchange where the replacement property is purchased before the relinquished property is sold. Reverse Exchanges are more complex and your QI should be involved in all steps and planning to ensure it is completed in accordance with IRC Section 1031.

The IRS Code does not allow members/partners to do his or her own exchange, only the entity can do so. Given enough preplanning, there is a technique referred to as a “drop & swap” whereby certain members/partners can drop their interest from the entity and enter the exchange individually and not at a member/partner.

No, typically, the Accommodator will Master Lease the property to the taxpayer enabling the taxpayer to manage the property, collect the rent and pay for expenses.

Qualifying Factors

  • Nearly all real estate is like-kind to other real estate.
  • Property cannot be a personal primary residence or vacation home.
  • The same taxpayer who sells must also purchase.
  • The 1031 Exchange needs to be disclosed to both the buyer of the relinquished property and the seller of the replacement property.
  • The exchange period could be shorter than 180 days if the individuals’ tax return is due prior to the 180th day. If that is the case an extension on filing the tax return would be necessary.
  • The price of the replacement property must be equal to avoid taxable gains. Any amount/debt not re-invested is considered ‘boot’ and is taxable.
  • The Fact Pattern and intent of the relinquished and replacement properties must support being held for investment or use in business.
  • If the seller of the replacement property is related to you by familial or business association, their eligibility as a seller requires special attention to potentially qualify.

Interested?

Send us a message at 1031@kootenaititle.com for any questions about the process or if you’d like to get started!