Your trusted Qualified Intermediary
What is a 1031 Exchange?
I.R.C. 1031
§1.1031(a)–1 Property held for productive use in trade or business or for investment. (a) In general—(1) Exchanges of property solely for property of a like kind. Section 1031(a)(1) provides an exception from the general rule requiring the recognition of gain or loss upon the sale or exchange of property.
In other words, IRC Section 1031 allows an investor to sell a property, reinvest the proceeds into a new property and defer all capital gain taxes. This creates opportunity for investors to grow their investment types or diversify their portfolio and increase their return on investment.
Types of exchanges
Simultaneous: the oldest type of exchange, but also the hardest to accomplish since two owners must agree to directly swap properties. The properties must be like-kind and of equal value to avoid capital gains tax.
Deferred (Delayed): the most common type of exchange; the Exchangor first sells their relinquished property, then has a 45-day window to identify a replacement property and 180 days total to complete the exchange.
Reverse: more complicated type; the Exchangor first buys their replacement property, then has 45 days to identify their relinquished property. In this type of transaction, Grant Group 1031 will act as your Exchange Accommodation Titleholder ("EAT") that will acquire and hold legal title to either your relinquished property or your like-kind replacement property during your Reverse 1031 Exchange transaction.
Construction (Improved): Exchangor sells relinquished property and the proceeds are transferred to your Grant Group QI as your "EAT", then Exchangor has 45 days to identify a replacement property and submit construction plans. Grant Group purchases the replacement property on your behalf and handles the construction costs from the remaining exchange dollars. *Note that under this type of improvement exchange, you may take title to the property once the 180 days is complete or the value of the replacement property and construction cost equals the value of the relinquished property you sold.
Things to Know
General Information
Ineligible Properties
General Information
- Properties must be "like-kind," referring to the nature or character and ignoring the grade and quality
- Must pass the napkin test, indicating the replacement property is of equal or greater value
- Both the Relinquished and the Replacement Properties must be held by the Exchanger either for investment purposes or for productive use in a trade or business
Eligible Properties
Ineligible Properties
General Information
- Raw land or farmland for improved real estate
- Oil & gas royalties for a ranch
- Fee simple interest in real estate for a 30-year leasehold or a Tenant-in-Common interest in real estate
- Residential, Commercial, Industrial or Retail rental properties for any other real estate
- Rental ski condo for a three-unit apartment building
- Mitigation credits for restoring wetlands for other mitigation credits
Ineligible Properties
Ineligible Properties
Rules of the 1031 Exchange
- Stock in trade or other property held primarily for sale (i.e. property held by a developer, “flipper” or other dealer)
- Securities or other evidences of indebtedness or interest
- Stocks, bonds, or notes
- Certificates of trust or beneficial interests
- Interests in a partnership
- Choses in action (rights to receive money or other property by judicial proceeding)
- Foreign real property for U.S. real property
- Goodwill of one business for goodwill of another business
- Property used only as a Primary residence – or that portion used only as a Primary Residence
Rules of the 1031 Exchange
Rules of the 1031 Exchange
Rules of the 1031 Exchange
- 3-Property Rule: Exchangor may identify up to three properties regardless of value
- 200% Rule: Exchangor may identify more than three properties identified properties' aggregate value doesn't exceed more than 200% of the relinquished property's value
- 95% Rule: Exchangor must acquire 95% of the FMV of the identified properties if more than three properties are identified and the aggregate value is more than 200% of the relinquished property
- The Napkin Test: the replacement property must be of equal or greater fair market value
Be Aware!
Rules of the 1031 Exchange
The "Boot"
- Related Party Requirement: if two parties are related as defined by §267(b) and §707(b)(1), they must hold the exchanged properties for two (2) years
- 45-day Deadline: replacement properties must be identified before midnight on the 45th day starting the day the relinquished property is closed
- 180-day Deadline: exchanges must be completed before midnight on the 180th day after the closing date
*These timeframes are not negotiable. Only certain federally declared disasters will allow exceptions.
The "Boot"
Rules of the 1031 Exchange
The "Boot"
Refers to non-like-kind property received in an exchange. This can be in the form of cash, installment notes, debt relief, or personal property and is valued at fair market value. Though this does not disqualify an exchange, it does indicate that part of the exchange will be taxable (a "partially tax deferred exchange").
To ensure there is no boot on the exchange, purchase like-kind property of equal or greater value and reinvest all the exchange funds.
The Role of a Qualified Intermediary
We are here to be a safe harbor for your exchange!
Our role as your Qualified Intermediary ("QI") is to prepare all exchange documents and forms, hold exchange funds in a segregated qualified exchange account with Capital One until the replacement property is closed, keep you up-to-date with deadline notifications, and answer any questions you may have throughout the process.
*Grant Group 1031 is not a tax advisors group. We are here for your 1031 exchange needs and to facilitate your transactions. Any tax advise should be sought by the appropriate tax professional or lawyer.
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