1031 Tax-Deferred Exchange

A tax-deferred exchange can be a very simple process if you stick to the guidelines set by the IRS. But as you can imagine, not everyone can fit perfectly into those guidelines. Patty Bell is experienced and knowledgeable and can help guide you through the process.

(This information provided compliments of Pioneer 1031 Company. 703 Americana Blvd., Suite 120, Boise, Idaho 83702. www.pioneer1031.com 1-800-556-1031.This information and glossary is not intended to be an exhaustive discussion of these terms. It is presented merely to provide basic definitions. Always verify with your accountant or attorney that information provided is accurate and up to date.)

What is a 1031 Tax-deferred Exchange?

The IRS has set up Section 1031 of the Internal Revenue Code to allow sellers of investment property to reinvest their proceeds into other investment property without paying tax at that time. Doing an exchange can help people who want to consider selling and relocating a place of business, or selling one type of investment property and reinvesting in another type of investment property. By using the 1031 exchange, they can defer paying tax on the gain each time an exchange is done until they finally sell their property and receive the cash proceeds.

When to consider a 1031 Exchange and what are the savings?

Always consult your attorney and/or tax advisor whenever you are thinking about selling investment or business property.

2 Very Important Time Restrictions:

  1. The 45 day identification period and the 180 day exchange period. These time restrictions are carved in stone. There are neither exceptions nor extensions. Once you have violated one of these time periods, your whole exchange fails.
  2. Your total exchange period is 180 days from the date the Warranty Deed recorded on your Relinquished Property(ies). To complete your exchange, you must have a recorded Warranty Deed on your Replacement Property before midnight of the 180th day.

Like-Kind Requirement:

Replacement property acquired in an exchange must be “like-kind” to the property being sold (Relinquished Property). Like kind means “similar in nature or character, notwithstanding differences in grade or quality.” In order for the properties to qualify as “like-kind” they must be held for productive use in a trade or business or held for investment purposes and be located within the United States. For example: Raw Land held for investment may be exchanged for Single Family Rentals or any combination of the below examples.

  • Single Family Rentals
  • Multi Family Rentals
  • Farm/Ranches
  • Raw Land
  • Offices
  • Retail
  • Motels/Hotels
  • Industrial
  • Leases of 30 years or more
  • Golf Courses

Property Not Eligible Under 1031:

  • Primary Residence
  • Foreign Property
  • Interest in Partnerships
  • Stocks, Bonds, or Notes
  • Stock in Trade
  • Money
  • Inventory or other property held inherently for resale

Basic Guidelines:

(These guidelines are to be used to help you effectuate a tax-deferred exchange. If you don’t meet all the guidelines, you can still do an exchange, but you may be subject to tax on any difference. We highly recommend you seek specific tax advice from your tax advisor or attorney particularly when attempting a partial exchange).

Equal or Greater Property Value:

Replacement Property purchase price should be equal to or greater than the sale price of the Relinquished Property. If you wish to acquire property of less value you may, but speak with your tax advisor regarding possible tax consequences.

Use All Proceeds from the Sale:

You should use all of your exchange proceeds from the sale of the Relinquished Property to acquire your Replacement Property. If you would like to receive some cash from the sale/exchange, you must make arrangements prior to the sale closing. Under the exchange regulations you may not have the ability to control or direct funds once escrow has closed. Any funds you receive from the sale of your investment property may be subject to capital gains tax. Speak to your tax advisor regarding possible tax consequences of receiving some exchange funds for personal use.

Equal or Greater Debt:

Your Replacement Property debt (mortgage) must be equal to or greater than your Relinquished Property debt (mortgage). You may acquire less or no debt on your replacement property but you should speak with your tax advisor regarding possible tax consequences of “Debt Relief”.

Important Questions to ask: 

  • What is a Delayed Exchange?
  • What is a Reverse Exchange?
  • What is the function of an Accommodator?
  • Why use an intermediary?
  • What are the Fees?
  • Is the Intermediary independent or affiliated with another company?
  • Is the Intermediary bonded or do they have Fidelity Insurance?
  • Does the Intermediary have experience with complicated exchange transactions?
  • What is the reputation of the Intermediary with the legal and real estate community?
  • How are your exchange funds held?
  • Who receives the interest on you exchange funds?
  • What is the Intermediary’s fee structure, and is it competitive?
  • Is the Intermediary a Member of the Federation of Exchange Accommodators?

Remember to call Patty Bell & Co., Realtors for ALL your Real Estate Needs! Click here to contact Patty