1031 Exchange FAQs

Below are many Frequently Asked Questions that come up about 1031 exchanges. Call us now at 239-659-1031 now or request your free consultation to learn more. Or, if you're ready you can start an exchange online now.

What is a "Like-Kind" property?

The IRS defines like-kind properties as being of "the same nature, character or class." This refers to the use of the property, not the quality. So the properties being sold and being purchased as part of a 1031 exchange must both be investment properties, not personal residences. This includes rental properties, land, and other properties used in trade or business. However, this does not mean that the properties need to be zoned exactly the same. For example, if you are selling a piece of land, you don't necessarily have to purchase another piece of land in order to do an exchange.

Properties that are claimed as personal use or properties purchased with the intent of being a quick flip do not qualify for a 1031 exchange. As a general rule to avoid tax problems, we suggest holding onto your investment property for at least a year and a day before doing a 1031 exchange.

How much time do I have to do an exchange?

1031 exchanges are very time sensitive. The process of preparing the exchange begins before closing on the relinquished property. You have 45 days to identify a replacement property starting from the closing date of the relinquished one and you have 180 days to close on the replacement property. One day over these time limits and your exchange is void.

Are 1031 exchanges tax free?

A 1031 exchange is tax deferred, not tax free. Deferring the taxes means you don't pay the taxes on the sale but if you decide to sell your new property at a later date and not reinvest in a new property and another exchange, you will then have to pay the taxes you originally deferred. However, if you sell and reinvest again, you can roll it over to a new investment property through another 1031 exchange. By rolling your property over, you will still be deferring the taxes. There is no limit to how many times you can exchange so theoretically you can do this over and over until you die and never have to pay the taxes!

What is a Qualified Intermediary?

A Qualified Intermediary (QI) facilitates the exchange process. Per IRS guidelines, the QI's must hold the cash proceeds from the sale of your old property and prepare the legal documents for your exchange. The QI then forwards those cash proceeds to the closing agent of the new property to complete the purchase.

How do I choose a Qualified Intermediary?

The QI is the company holding your money during the exchange so this company must be reputable and experienced. At 1031 Exchange Connection, unlike many other QI's we are bonded, insured, and owned by CPA who specializes in real estate tax planning. Learn more about why to choose us as your Qualified Intermediary.

Who is disqualified from acting as a Qualified Intermediary?

Your QI cannot be a friend, employee, broker, your CPA, or your attorney. It must be an independent third party.

Does my property qualify for a 1031 exchange?

In a 1031 exchange, your property must be held for investment. Some examples include:

  • A building that is used for a business or trade
  • A property that is rented for 14 or more days per year at fair market value
  • A piece of land held for investment

Some properties that won’t qualify for exchange are:

  • Your principal, or homesteaded, residence.
  • A second home that is not income producing (no renters).
  • A property strictly held for resale (used as a flip). The IRS frowns upon this, so as a general rule we tell clients to hold onto their investment property for a year and a day.
  • A property located in a foreign country.

Can foreign property be exchanged for U.S. property?

No, U.S. property must be exchanged for U.S. property. However, a foreign investor may do 1031 exchange if both the old and new are U.S. real property interests. This type of exchange will help you avoid FIRPTA taxes.

Can I buy the replacement property before the sale of the old property?

Yes! A reverse exchange allows the exchanger to acquire their like kind replacement property first, then sell their old relinquished property within the guidelines of a 1031 exchange. The IRS will not allow you to hold title to both the old and new properties at the same time during a 1031 exchange so your Qualified Intermediary must take title to your new property first and hold it until the old one sells. Once your Qualified Intermediary has taken title to the new property, you have 45 days to identify the property you want to sell, 180 days to sell it, and then get into title to the new property the QI is holding for you.

What is capital gains tax?

This is the tax on the profit from the sale of a property or investment.

For example, let’s say you purchased a property $300,000. A few years later, you sell it for $500,000, or a $200,000 capital gain. You will now be taxed on the capital gain, as well as the depreciation recapture if the property was a rental. In this example, that could end up costing you about $50,000 (average tax rate 25%), perhaps more depending if you live in a taxable state. This why you do a 1031 exchange!

How many times can I do a 1031 exchange?

There is no limit to how often or how frequently investors may perform 1031 exchanges.