Entrust Learning Center > 5 Investing - Real Estate > The Effortless 1031 Exchange - Facts and Misconceptions

The Effortless 1031 Exchange - Facts and Misconceptions

1031 Exchanges can be easy if you follow the rules laid out by the IRS. Here are the six basic things everyone needs to know. Knowing these easy rules will guarantee your exchange will qualify.

By: By: Dave Owens and Kathy Moran

1. You must use a Qualified Intermediary (QI) as defined by the regulations; typically this is an unrelated third party. Your exchange must be in place prior to the closing of your relinquished property with a QI.

2. Net Selling Price (NSP). This is the amount of money you will need to reinvest in your replacement property to defer all your taxes. This is figured by taking the gross selling price less closing costs.

3. All deeded real estate qualifies for a 1031 Exchange. The relinquished property sold must be held for investment. Typically investment will include rental or properties held for speculative purposes. You can buy multiple replacement properties in an exchange.

4. You cannot touch your equity proceeds at closing. These funds must be held by the QI and applied to your replacement property.

5. 45 day rule – This means you must identify your replacement property(ies) to your QI by midnight on your 45th day from the closing of your relinquished property.
Your identification must be a specific address(es).

6. 180 day rule – This means you must complete your closing on your identified replacement property(ies) by the 180th day from the closing of your relinquished property.

There are a few common misconceptions when it comes to doing 1031 Tax Deferred Exchanges. These misconceptions can be avoided by discussing the exchange with your accountant and Qualified Intermediary in advance of closing.

• Does the replacement property have to be of equal or greater value? No, you can buy down. If you purchase a replacement property of lesser value, you would defer partial taxes and be subject to tax on the amount not reinvested. Your tax consultant should review the partial exchange to make sure you will still have a tax savings if you are buying down.
• Can I take cash out of the exchange? Yes, you can take cash out of your exchange at the time of the closing on the relinquished property; these funds will be subject to capital gains tax.
• Can I take out a larger mortgage on my replacement property and get cash back? No. If you do this, the funds going back to you will be looked at as boot and they will be subject to taxes.
• Can I sell in mine and my wife’s name and buy in a LLC or Corporation? No, you need to buy title the same way you sold title. There are a few exceptions to this rule; LLCs or Grantor Trust can be considered the same as the taxpayer.
  

A little planning can go a long way in a 1031 exchange. If a transaction is reviewed with a QI and your tax advisor, the exchange can be a seamless process.

Dave Owens and Kathy Moran are 1031 Specialists with 1031 Tax Free Strategies in Fort Myers, Florida.

Keywords|Tags

Refine your search using these keywords