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Every 1031 Exchange transaction is unique. Consult an attorney or tax advisor to determine how an exchange may best be structured to accomplish your investment goals and use a competent Qualified Intermediary to coordinate your exchange.
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Benefits of a 1031 tax-deferred exchange |
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A Section 1031 exchange enables you to postpone or potentially eliminate taxes due on the sale of qualifying properties. |
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By deferring the tax, you are able to use the proceeds that would have been used to pay capital gain taxes and invest in another property. In effect, you receive an interest free loan from the federal government, in the amount you would have paid in taxes. |
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Any gain from depreciation recapture is postponed. |
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This strategy allows you to reallocate your investment portfolio without paying tax on any gain. |
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Nationwide 1031 Exchange Services, LLC can accommodate Simultaneous and Delayed Exchange transactions |
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Simultaneous Exchange: The exchange of the relinquished property and the replacement property occur at the same time. |
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Delayed Exchange: The most common type of exchange. A Delayed Exchange occurs when there is a time gap between the transfer of the Relinquished Property and the acquisition of the Replacement Property. A Delayed Exchange is subject to strict time limits, which are set forth in the Treasury Regulations. |
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Guidelines to follow if you want to defer ALL the taxable gain
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The value of the replacement property must be equal to or greater than the value of the relinquished property. |
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The equity in the replacement property must be equal to or greater than the equity in the relinquished property. |
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The debt on the replacement property must be equal to or greater than the debt on the relinquished property. |
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All of the net proceeds from the sale of the relinquished property must be used to acquire the replacement property. |
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Restricted access to exchange funds |
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Once you close on the sale of your exchange property (Relinquished Property), the proceeds are deposited directly into an exchange account with your Qualified Intermediary. The exchange funds can only be withdrawn in accordance with the Regulations. The regulations state that the taxpayer cannot receive any money until the exchange is complete. IF you want to receive a portion of the sales proceeds from your Relinquished property in cash, then you must make the necessary arrangements prior to the closing, and you must receive this cash directly from the escrow closing agent before funds are transferred to the Qualified Intermediary. Any cash received in this manner is referred to as “boot”, and it will be taxable income to you. |
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boot |
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Boot is any property received by you in the exchange which is not like-kind to the relinquished property. Boot is characterized as either "cash" boot or "mortgage" boot.
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mortgage boot |
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Mortgage Boot consists of liabilities you assume or give up in the transaction. You pay mortgage boot when you assume or place debt on the replacement property. You receive mortgage boot when you are relieved of debt on the replacement property. If you do not acquire debt that is equal to or greater than the debt that was paid off, you are considered to be relieved of debt. The debt relief portion is taxable, unless offset when netted against other boot in the transaction.
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cash boot |
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Cash Boot is any boot you receive in the transaction, other than mortgage boot. Cash boot may be in the form of money or other property.
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Boot "netting" rules |
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Cash boot paid offsets cash boot received |
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Cash boot paid offsets mortgage boot received (debt relief) |
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Mortgage boot paid (debt assumed) offsets mortgage boot received
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Mortgage boot paid does not offset cash boot received
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The taxpayer can’t sell their relinquished property, put the proceeds in a separate bank account of their own and then use the proceeds to purchase the replacement property. |
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The IRS regulations are very clear. The taxpayer may not receive the proceeds or take constructive receipt of the funds in any way, without disqualifying the exchange. |
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If you have already signed a contract to sell the relinquished property, you may still be able to take advantage of the tax-deferred exchange. |
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As long as you have not transferred title, or the benefits and burdens of the relinquished property, you can still set up a tax-deferred Exchange. Once the closing occurs, it is too late to take advantage of a Section 1031 tax-deferred exchange (even if the taxpayer has not cashed the proceeds check). |
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There are time restrictions on completing a Section 1031 exchange. |
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You have 45 days after the date that the relinquished property is transferred to properly identify potential replacement properties. The exchange must be completed by the date that is 180 days after the transfer of the relinquished property, or the due date of your federal tax return for the year in which the relinquished property was transferred, whichever is earlier. Thus, based on a calendar year, the exchange period may be cut short for any exchange that begins after October 17th. However, you can get the full 180 days, by obtaining an extension to file your tax return. |
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If you cannot identify any replacement property within 45 days, or close on one or more of your identified properties before the end of the 180 exchange period then you haven’t met the exchange requirements and you will not have a valid exchange. You will not benefit from the Section 1031 Exchange. |
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Unfortunately, there are no extensions available. If you do not meet the time limits, the exchange will fail and you will have to pay any taxes arising from the sale of the relinquished property. |
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There are 3 Rules that limit the number of properties that you can identify. |
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You must meet the requirements of at least one of these rules: |
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3-Property Rule: You may identify up to 3 potential replacement properties, without regard to their value; or |
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200% Rule: Any number of properties may be identified, but their total value cannot exceed twice the value of the relinquished property, or |
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95% Rule: You may identify as many properties as you want, but before the end of the exchange period you must acquire replacement properties with an aggregate fair market value equal to at least 95% of the aggregate fair market value of all the identified properties. |
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