1031 Exchange FAQ's
Q. How Much Do I Need To Spend On My Replacement Real Estate?
A. This is probably the question that we get asked most often. The answer lies in the net selling price (NSP). Take the contract sales price of your relinquished property and deduct any realtor commissions and title fees. What you are left with is the net selling price. That is the “magic number” you need to spend on the next property to ensure you defer all capital gains.
Q. What Is Considered Investment Real Estate?
A. There are a number of options available to investors looking to exchange into like-kind properties. Here is list of some of those options:
- Rental properties
- 30-year leases including options
- Raw land
- Office buildings
- Shopping centers
- Trailer parks
- Retail stores
Q. Who Is The Qualified Intermediary?
A. The qualified intermediary (QI) is the independent third party that is required by the IRS to act as the middleman in both the sale and purchase transactions. The QI cannot be the taxpayer, a descendant of the taxpayer, or an agent of the taxpayer (realtor, attorney, accountant, etc.). The role of the QI is to prepare the exchange documents, coordinate with the closing agents for each transaction, and escrow the funds.
Q. What Is The 45 Day Rule?
A. The exchanger must identify any possible replacement properties within 45 calendar days of closing on their relinquished property. If a property has not been properly identified by midnight of the 45th day, the taxpayer will be unable to complete the exchange.
Q. What Is The 180 Day Rule?
A. The exchanger must close on the replacement property by the earliest of either the due date of the tax return (including extensions) for the tax year that the exchange took place, or within 180 calendar days after closing on the relinquished property.
Q. What Does Tax-Deferred Mean?
A. When a client reinvests the proceeds from the sale of investment property to another piece of investment property, they defer capital gains tax that would otherwise be due at the time of the sale.
Q. What Does The Verbiage On The Contract Need To Say?
A. Language for sale of relinquished property:
“Buyer is aware that Seller has the option to qualify this transaction as an Internal Revenue Code Section 1031 tax deferred exchange. Seller requests Buyer’s cooperation in the event of an exchange and agrees to the assignment of this contract to 1031 Tax Free Strategies, LLC by the Seller. Seller agrees to hold the Buyer harmless from any and all claims, liabilities, and costs of such an exchange.”
Language for purchase of replacement property:
“Seller acknowledges and agrees that Buyer may engage in a deferred or reverse exchange of like-kind property (an exchange) utilizing a qualified intermediary (QI) or an exchange accommodator titleholder (EAT) pursuant to Section 1031 of the Internal Revenue Code of 1986, as amended, and the Treasury Regulations, revenue procedures and other guidance promulgated thereunder. Notwithstanding any provision herein to the contrary, in the event Buyer elects to engage in a deferred or reverse like-kind exchange, the Seller agrees to consent to the assignment of Buyer’s rights under this Agreement to a QI or EAT in order to facilitate such deferred or reverse like-kind exchange. Seller further agrees to execute any and all documents reasonably necessary to consummate the purposes of this section. In the event Buyer engages an EAT for its exchange, Seller agrees to transfer legal title to the property to such EAT pursuant to instruments of transfer otherwise complying with the terms of this agreement. Any assignment by Buyer in conformance with this section shall be at the cost of Buyer, and such assignment shall not relieve Buyer of any of its obligations (including any post-closing obligations) or liabilities under this agreement or delay the closing hereunder.”
Q. How Do I Start An Exchange?
A. Complete the form below and submit.