1031 Exchange Rules - San Diego CA
We have handled multiple escrows where a 1031 exchange was in play by either the seller or the buyer. IRC Section 1031 essentially allows an owner of an investment or business property to defer capital gains tax when selling their property if they reinvest in a like-kind property. Capital gains tax explained further by Las Vegas agent Debbie Drummond.
3 types of 1031 exchanges allowed: simultaneous, deferred, and reverse.
Simultaneous is the simplest 1031 exchange. The investor will sell his existing home and purchase a like-kind property at the same time.
With a deferred 1031 exchange, the investor can sell his property and subsequently purchase a like-kind replacement property. The money received from selling the current property must be used to purchase the like-kind replacement property. The investor has a maximum of 45 days to identify another like-kind property and it must be identified clearly in writing, signed, and delivered to the party involved in the exchange or a qualified intermediary. Ways to identify the property include the address of the home.
A reverse 1031 exchange is the most complex and requires a transaction through an exchange accommodation title holder. In a reverse 1031 exchange, the seller acquires a like-kind replacement property and must sell his current property within 180 days of the sale of the like-kind replacement property.
What classifies a property as like-kind?
A like-kind property is any property that is in the same nature, character, or class as the other. The quality and grade of the property is not considered. Properties outside of the United States are not considered like-kind properties.
Exceptions and Restrictions
There are zero exceptions or extensions allowed with 1031 exchanges unless there is a presidential declared disaster. Thus, it is highly recommended that the taxpayer seek an exchange facilitator or Qualified Intermediary to assist with the transaction and ensure that it is handled properly and within the time restrictions.
Both properties in the transaction must be an investment or business property and cannot be for personal use. If the taxpayer takes control of the cash or other proceeds before the exchange is complete, then they will be disqualified for the 1031 exchange and be forced to pay capital gains tax. The taxpayer cannot be their own facilitator and must keep track of the basis of the new property acquired.
How long is the tax deferred until?
The tax is deferred until the investor sells his property without another exchange and also includes any additional gains realized from other 1031 exchanges.
Reporting the 1031 Exchange
To report the 1031 exchange, the taxpayer must complete the IRS Form 8824 and file it with the tax return for the year in which the exchange occurred. Items on Form 8824 include the description of the property exchanged, the dates, relationship between the parties to the exchange, the gain or loss, and the adjusted basis.
Reasons For A 1031 Exchange
- Retirement Exchange: Sell, then exchange into a property you retire in down the road and/or a second one for retirement income.
- College Exchange: Sell, then exchange into a property you rent to your kids to use while they attend college.
- Divorce Exchange: Sell, and since one party generally moves out in a divorce that person exchanges their “former residence” into a new investment.
- Vacation Home Try New Place Exchange: Sell, then exchange that underutilized vacation property into a better investment or vacation property in a new area.
- Make More Money Each Month Exchange: Sell highly appreciated property that is not cash flowing as high as you’d like, then exchange into a better asset in another market returning double $$ digit returns.
- No More Toilets to Manage Exchange: Exchange your heavy maintenance rental property into a fractional interest in Fortune 500 property with no management issues.Great for retirement!
- Cash Out Exchange: Must be selling a $2M+ property
- Sell, then exchange into an interest of a AAA multi-million dollar property. After the exchange, cash out through a re-finance with no mortgage payments.
- Fix that Property Exchange: Sell, then exchange into any property that needs work and use the exchange money to fix it, tax deferred.