1031 EXCHANGES FREQUENTLY ASKED QUESTIONS
What is a 1031 Exchange?
An IRS-approved real estate investment technique that allows owners to defer capital gains taxes by selling a property, identifying a like-kind replacement property within 45 days, and closing escrow on the new property within 180 days. In an ordinary sale, the property owner is taxed on any gain realized by the sale of the property. In an Exchange, some or all of the tax on the transaction is deferred until some time in the future, usually until the newly acquired property is sold (although it can be exchanged again and again, thereby deferring taxes indefinitely).
What is Revenue Procedure 2002-22?
Guidance from the IRS that outlines how to structure a fractional-deed co-ownership property offering to individual 1031 Exchangers.
What is “like-kind” property?
All real property is ‘like-kind’ and can be exchanged for other real property, such as vacant land for an apartment building or a rental home for a retail center.
Is foreign property considered like-kind?
No. Only property located within the fifty United States and the U.S. Virgin Islands is considered like-kind and eligible for a 1031 Exchange.
What is the ‘downleg’?
The downleg represents the property to be sold as part of the 1031 Exchange.
What is an ‘upleg’?
The upleg represents the property to be acquired in the 1031 Exchange.
Can I 1031 Exchange my co-ownership interest in a property?
Yes. A co-ownership interest is considered like-kind and should qualify for Section 1031 consideration. The percentage interest is not material, but the investor’s interest in the property must have been held by the owner for the productive use in trade or business, or for investment (i.e., not personal property).
How long is the identification period?
An owner has 45 days from the date of sale to identify like-kind replacement property then has 180 days to close. The identification period terminates at midnight on the 45th day following the initial transfer date, regardless of Sundays or holidays.
What is an Exchange Accommodator?
The Exchange Accommodator, or ‘Qualified Intermediary,’ holds the proceeds of the ‘downleg,’ or property sale, and monitors critical dates necessary to meet 1031 Exchange requirements.
Can one property be exchanged for several?
Yes. One or more Relinquished Properties may be exchanged for one or more Replacement Properties, subject to specific rules and limitations.
When will gain or loss be recognized?
In a successfully completed 1031 Exchange, the gain isn’t recognized until the owner otherwise disposes of the Replacement Property in a fully taxable transaction. There is no time limit, and if the owner continues to execute 1031 Exchanges, the gain may never be recognized.
Can corporations or partnerships Exchange?
Yes, providing it is exchanging real property for real property. The IRS specifically excludes stocks and partnership interests from being considered like-kind to real estate.