Frequently Asked Questions

Aside from the obvious tax deferral advantages, 1031 exchanges also allow investors to diversify their portfolio, get exposure to new markets, increase cash flow and purchasing power, relief from high-problem properties. 

All real property in the United States and some territories held for investment purposes or used in a taxpayer's trade or business. The replacement property must also be "like-kind" to the relinquished property (i.e., fee interest, fractional (tenancy-in-place) interest, leasehold interest (30+ year lease), easements, water or mineral rights, etc.).

A personal residence, property held for resale (inventory or fix/flips), corporation common stock, partnership/LLC membership interest, notes, or bonds are all disqualified property types.

YES. There are two deadlines that you should be aware of, as there are no exceptions (unless a Presidentially Declared Disaster occurs). The first is the 45-day identification deadline for your replacement property. You must return the 45-Day Notification Letter to us BEFORE midnight on the 45th day or your 1031 cannot be completed. The second is the 180-day deadline for the completion of the exchange. You must acquire your replacement property within 180 days of the exchange's start date.

There is no specific time limit for holding a property to engage a 1031, but the general rule of thumb is to hold an investment for at least a year but preferably two. An important note: if you are exchanging with a "related party", there is a required hold period of two (2) years.

Per I.R.C.  Section 267, the following are examples of "related parties": Members of the same family as defined in subsection (c)(4), an individual and a corporation where the individual owns more than 50% stock, two corporations of the same controlled group, a grantor and a fiduciary of any trust, two fiduciaries of different trusts with the same grantor, a fiduciary and beneficiary of a trust, a fiduciary and beneficiary of different trusts with the same grantor, a fiduciary of a trust and a corporation of which that trust owns 50% or more of the stock, a person and a Section 501 organization that person or a member of their family owns, a corporation and a partnership if the same person owns more than 50% stock or interest, an S corporation and another S corporation if the same person owns more than 50% stock in both, an S corporation and a C corporation if the same person own more than 50% stock in both, or in some cases an executer and beneficiary of an estate.

You are allowed to identify however many you want, but there are rules if you plan on identifying more than three (3) properties. The identified properties cannot have an aggregate value of 200% more than the relinquished property. If the value exceeds 200%, then 95% of the properties must be purchased.

The Napkin Test compares the relinquished and replacement properties to quickly determine if there is any "boot" (taxable assets). The test allows the Exchangor to determine if they are exchanging across or up in value regarding equity and mortgage (known as equal or up).

"Boot" is the amount of taxable assets from an exchange where either the value of the replacement property was lower than the value of the relinquished property, or any non-like-kind/disqualified property was received in an exchange. Examples of boot are cash either taken from the settlement before proceeds are send to QI, received at closing of replacement property, or any proceeds remaining after the exchange ends, non-qualified property as described above, proceeds in the form of a note*, relief from debt which is not replaced on the replacement property. 

*An Exchangor can utilize the installment sale rules of IRC Section 453 to "spread out" the recognition of gain.

Yes, the IRC is a federal regulation allowing for 1031 exchanges, however prior to exchanging properties across state lines, there are some things to understand. Four states (California, Massachusetts, Montana, and Oregon) have clawback provisions that allow them to reclaim state taxes deferred during the exchange on any gain in property value accrued and realized in a future profitable sale. In some states there is a mandatory tax withholding for nonresident individuals or businesses selling real estate within that state.  The tax can be avoided in some cases by understanding each state’s regulations, ensure you consult your tax advisor or lawyer regarding any potential additional paperwork if you are exchanging property within the following states (this list may not be all-inclusive):

• Alabama, California, Colorado, Georgia, Hawaii, Maine, Maryland, Mississippi, New Jersey, New York, North Carolina, Oregon, Pennsylvania, Rhode Island, South Carolina, Vermont, West Virginia