Frequently Asked Questions

Q- What exactly is a tax-deferred exchange?

A- Typically, a property owner is taxed on any gain realized from the sale of a property. However, with a Section 1031 Exchange, the taxes on the gain of the sale is deferred until some future date. A property owner trades 1 or more properties (the first sale) for 1 or more replacement properties of "like-kind" (the second half sale).  This basically realizes that there is no real economic gain for the investor since they have purchased another property of like kind so they should not have to pay taxes on the original "gain" since it exists only on paper.  When the replacement property is ultimately sold, gains at that time are subject to taxes.

Q - What are the biggest benefits of exchanging versus selling?

A- A 1031 exchange is 1 of the few methods available to postpone or eliminate taxes due on the sale of qualifying properties. By deferring the taxes, you have more money available for investment in the other properties.

Q - What are the different types of 1031 exchanges?

A- Simultaneous Exchange: The exchange of the first property for the new property occurs at the exact same time.
Delayed Exchange: This is the most common. This is when there is a time gap between the transfer of the first property and the acquiring of the new property. These are subject to strict time guidelines.
Build-to-Suit Exchange: This allows the property owner to build on or make improvements to, the new property, using the exchange profits.
Personal Property Exchange: Exchanges that are not limited to real estate properties.

Q - What are the requirements for a valid exchange?

A - Qualifying Property - Certain types of property do NOT qualify : property held for sale; inventories; stocks; bonds; interests in partnerships; Generally, if property is not specifically excluded, it can qualify for 1031 tax-deferred treatment.
Proper Purpose - Property acquired for immediate resale will not qualify. The taxpayer's personal residence also does not qualify.
Like Kind - Replacement property must be "like-kind" to the property being sold. Property located outside the United States is not like-kind to property in the United States.
Exchange Requirement - The relinquished property must be EXCHANGED or TRADED for other property, not sold for cash and using the proceeds to buy the replacement property. Most deferred exchanges are handled by Qualified Intermediaries, like us, who help you with the process.

Q - What is a Qualified Intermediary (QI)?

A Qualified Intermediary is an independent party who facilitates the tax-deferred exchanges legally and properly. The QI cannot be the taxpayer or a disqualified person.

Q - Can the taxpayer just sell property and put the money in a separate bank account and use it only for the purchase of the new property?

A - NO! The IRS regulations are very clear.

Q - What are the time restrictions on completing a Section 1031 exchange?

A - The taxpayer has 45 days after the date that the sold property is transferred to identify potential replacement properties. Then, the exchange must be completed by the date that is 180 days after the transfer of the said property.

Q - What if I cannot identify any replacement property within 45 days or close on a replacement property before the end of the 180 days?

A - Unfortunately, there are no extensions available. That's where we can come in and help you fit your needs within the proper timetable.