1031 exchanges can be complicated. 1031 exchanges can be frustrating. And, for some, 1031 exchanges can be near impossible. As we’ve said before, our goal at 1031 Crowdfunding is to ensure every 1031 exchange investor has the opportunity to complete a successful exchange. So today we want to help exchangers by providing a quick guide that lists the important things exchangers need to know before exchanging.
This guide highlights the things you’ll want to remember before and during your exchange. For more information on any of these topics, please use the provided links to visit our previous educational posts that will describe the given topics more fully.
When planning and completing a 1031 exchange you must remember to:
1. Engage a Qualified Intermediary.
A QI is an independent entity that is not the investor, an agent of the investor, or a related party to the investor. A QI enters into a written agreement with the investor to complete the exchange transactions on their behalf for the purpose of adhering to 1031 exchange requirements. Taxpayers will be taxed on any income they receive, therefore, one of the main functions of the QI is to restrict the investor’s access to the sale proceeds after the sale of the relinquished property and transfer it as payment for the replacement property. See What is a Qualified Intermediary?
2. Relinquish an eligible property.
Qualified properties include properties that are either held for investment purposes or for a productive use in a trade or business.
3. Identify candidate replacement properties within the 45-day Identification Period.
Exchangers have 45 days after the selling their relinquished property to identify the property that will serve as the replacement property in their exchange. Multiple properties can be identified as long as the exchanger adheres to the 3 Property Rule, The 200% Rule, or the 95% Exception. See Replacement Property Identification, Choosing an Identification Strategy.
4. Acquire qualified like-kind property.
Like-kind properties do not have to be the same type of property as the relinquished property; instead, they must be used for the same purpose, either for investment or for productive use in a trade or business.
5. Acquire property from the list of identified candidate properties.
For a property to qualify as a replacement property, it must have been identified during the Identification Period.
6. Acquire property that is of equal to or greater value than the relinquished property.
The purchase price of the replacement property must be equal to or greater than the net sales price of the relinquished property, and all equity received from the sale of the relinquished property must be used to acquire the replacement property.
7. Complete the acquisition transaction before the 180-day Exchange Period Deadline.
Exchangers have 180 days from the time they sell the relinquished property to the time they acquire their replacement property with the exception of exchangers whose deadlines for filing the tax returns for the year in which the relinquished property was sold arrives before the 180-day deadline. The exchange must be completed prior to the tax return filing deadline. Most exchangers will be able to extend this period to the full 180 days by filing for an extension on their tax returns. See Will the Year-End Cut Your 180 Days Short?
8. Avoid Boot.
Boot is any additional value acquired in an exchange transaction that does not qualify to be included in a tax-deferred exchange. Any such additional value will cause a taxable event. There are three most common forms of boot. Mortgage boot occurs when the debt owed on the replacement property is less than the debt that was owed on the relinquished property. Cash boot occurs when the cash received from the sale of the relinquished property is greater than the cash paid to purchase the replacement property. Personal property boot occurs when the purchase of a replacement property includes non-like-kind or personal property items. See What is Boot? & How to Avoid It, Put Your Boot to Work, Taking the Stress Out of Debt, Avoiding Taxes and Mortgage Boot Using the Debt Reduction Principal.
9. Report your exchange to the IRS.
You must report an exchange to the IRS on Form 8824, Like-Kind Exchanges and file it with your tax return for the year in which the exchange occurred.
Follow those rules and you’ll have a completely tax-deferred exchange. You’ll want to work with your qualified intermediary and tax advisor to ensure your unique exchange is completed properly.
While the information provided above has been researched and is thought to be reasonable and accurate, 1031 Crowdfunding are not lawyers or tax professionals. It’s important to consult with a licensed tax professional regarding your personal tax situation.
Beyond the 1031 exchange rules, regulations and requirements, maybe you’d like a little context or history of 1031 exchanges. If so, here are some things you might be interested in.
If you’re not sure what a 1031 exchange is, see:
If you’re wondering why you’d want to participate in 1031 exchanging, see:
If you want to know more about 1031 Crowdfunding, see:
How the JOBS Act affects 1031 Crowdfunding