1031 exchanges can be confusing to those who are unfamiliar with the process. To help taxpayers better understand the basics of 1031 exchanges, we’ve compiled a list of frequently asked questions about section 1031. If you have any more questions about the 1031 exchange process, contact our Rochester qualified intermediaries at – 877.373.1031.
What is a 1031 Exchange?
A 1031 exchange is a way of deferring the capital gains taxes on the sale of property within the United States. In order to defer these gains, you need to roll your net proceeds from the sold property into new like-kind replacement property of equal or greater value, equity, and debt. When done correctly, a 1031 exchange allows you to defer your taxable gains, and keep that money working for you in a newer, bigger investment property. Section 1031 is detailed in the Internal Revenue Code and is a completely legitimate method of deferring taxes.
How Do I Determine if My Properties are Like-Kind?
One of the most important rules of a 1031 exchange is that your relinquished property and your replacement property both need to be like-kind. Essentially, like-kind means that both properties are of a similar “nature or character.” When it comes to real property, most real estate can be exchanged for most other real estate. So a farm in Rochester can be exchanged for a hotel in Minneapolis. If you are exchanging personal property (chattel), the like-kind requirement is a lot more stringent. For example, a painting is like-kind to another painting, but not like-kind to a railroad car.
What is a Qualified Intermediary & Why Do I Need One?
A qualified intermediary is a neutral third-party who helps facilitate the 1031 exchange. The qualified intermediary also acts as a sort of buffer between you and the capital gains of your relinquished property. Your qualified intermediary can insulate you from receiving any of these gains during a 1031 exchange by keeping the money in a separate, segregated account before you complete your exchange.
There are also rules about who can and cannot act as your qualified intermediary. Any person who is related to you or has acted as your agent (your attorney or CPA, for example) within the last two years cannot act as your intermediary.
What are the Time Restrictions of a 1031 Exchange?
In any given 1031 exchange you have 180 days total to complete your exchange. That clock starts the day after you sell your relinquished property. Additionally, the first 45 days are known as your identification period. During this time you have to identify in writing the properties that you intend to exchange into before your allotted 180 day exchange period. You can calculate your exchange deadlines using our 45 /180 day calculator.