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5 Top Questions on Tax-Deferred 1031 Exchanges

There are many compelling reasons to consider a tax-deferred 1031 exchange when selling an investment property. However, such exchanges can be complex. There are deadlines, restrictions, and rules you need to follow. 

If you’ve been thinking about completing a 1031 exchange, the answers to the following frequently asked questions may help you feel more at ease with the process.

What Exactly is a 1031 Exchange?

A 1031 exchange is a transaction that allows property investors to defer capital gains taxes and depreciation recapture by replacing one investment property with another. The term “1031 exchange” comes from section 1031 of the Internal Revenue Code, which establishes the rules for a successful exchange. 

How Do I Qualify for a 1031 Exchange?

Any individual who owns an investment or business property can engage in a 1031 exchange. To qualify, you must sell your property (the “relinquished property”) and purchase a “like kind” property (the “replacement property”) while following all the 1031 exchange rules. 

According to the IRS, a wide variety of taxpayers are eligible participate in a 1031 exchange:

  • Individuals
  • C corporations
  • S corporations
  • General partnerships
  • Limited partnerships
  • Limited liability companies
  • Trusts
  • Any other taxpaying entity

What Types of Properties Can I Use?

To qualify for a 1031 exchange, both the relinquished and replacement properties must be “held for productive use in a trade or business or for investment” and be “like-kind.” However, the definition of like-kind is broader than you may think. Under IRS 1031 exchange rules, properties must be of “the same nature, character, or class” but the “quality or grade” does not matter. Essentially, most real property in the U.S. is like-kind to other real property in the U.S. 

This means, for example, that you could exchange acres of farmland for an apartment building, an industrial park for a retail store, or a hotel for a restaurant. However, it’s important to note that some properties do not qualify. Personal property such as a primary residence or a vacation home not used as a rental property does not qualify. 

Are There Any Deadlines I Need to be Aware of?

There are two important deadlines you must meet when engaging in a 1031 exchange:

  • 45-days
  • 180-days

After selling your relinquished property, you have 45 days to identify, in writing, one or more potential replacement properties. Then, you have a total of 180 days from the sale date of the relinquished property to close on at least one of the properties you have identified.

These deadlines are based on calendar days and the IRS rarely grants extensions. If the 45th or 180th day falls on a weekend or holiday, you may need to meet the requirements earlier. The time periods also run concurrently, so if you take the full 45 days to identify your replacement property, you’ll only have an additional 135 days to close.

Who Can Help Me Execute My 1031 Exchange? 

Working with professionals who are experienced in 1031 exchanges can help you avoid common mistakes that may lead to having your exchange disqualified. These professionals may include your attorney, a tax professional, or a real estate professional who understands 1031 exchanges. In addition, the IRS requires you to work with a Qualified Intermediary (QI) to facilitate your transaction, hold cash, and make sure you don’t take “constructive receipt” of sale proceeds and trigger a taxable gain. 

More Questions? 

The team at First Guardian Group is happy to answer all your 1031 exchange questions. We can also help you find the right professionals to help you through the process. Contact us today to schedule a free consultation at 866 398-1031.

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Help Save 1031 Exchanges
Write to your Member of Congress and Senators urging them to oppose restricting Section 1031 like-kind exchanges. As part of the American Families Plan, the Biden Administration has proposed eliminating the application of Section 1031 for gains greater than $500,000. Like-kind exchanges have been part of the U.S. tax code since 1921 and are one of the tax code’s most powerful economic tools. It is critical that we all vigorously and visibly oppose this proposal. Make your voice heard with a pre-filled letter, which you can customize to add personal anecdotes or powerful client stories to highlight the positive impact of Section 1031 like-kind exchanges. Take action today by clicking HERE.

Paul Getty

Paul Getty is a licensed real estate broker in the state of California and Texas and has been directly involved in commercial transactions totaling over $3 billion on assets throughout the United States. His experience spans all major asset classes including retail, office, multifamily, and student, and senior housing. Paul’s transaction experience includes buy and sell side representation, sourcing and structuring of debt and equity, workouts, and asset and property management. He has worked closely with nationally prominent real estate brokerage and investment organizations including Marcus Millichap, CB Richard Ellis, JP Morgan, and Morgan Stanley among others on the firm’s numerous transactions. Paul also maintains a broad network of active buyers and sellers of commercial real estate including lenders, institutions, family office managers, and high net worth individuals. Prior to founding First Guardian Group/FGG1031, Paul was a founder and CEO of Venture Navigation, a boutique investment banking firm specializing in structuring equity investments made by institutions and high net worth individuals. He possesses over 35 years of comprehensive worldwide business management experience in environments ranging from early phase start-ups to multi-billion-dollar corporations. His track record includes participation in IPOs and successful M&A activity that has resulted in investor returns of over $700M. Paul holds an MBA in Finance from the University of Michigan, graduating with honors, and a Bachelor’s Degree in Chemistry from Wayne State University. Paul Getty holds Series 22, 62, and 63 securities licenses and is a registered financial representative with LightPath Capital Inc, member FINRA /SIPC. Paul is a noted speaker, author, and actively lectures on investments, sales, and management related topics. He is author of The 12 Magic Slides, Regulation A+: How the JOBS Act Creates Opportunities for Entrepreneurs and Investors, and Tax Deferral Strategies Utilizing the Delaware Statutory Trust (DST), available on Amazon and other retail outlets.

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