Frequently Asked Questions
1What is "Boot" in 1031 Exchanges?
Boot is non-like-kind property, such as cash, notes, securities, or other property which does not qualify for nonrecognition under Section 1031. It is possible to have boot and still have a qualifying exchange. Any net boot received is taxed and the remainder of the like-kind property exchanged is not taxed, thereby creating a partially taxable sale and have a qualifying exchange.
2Can A 1031 Exchanged Overlap The April Income Tax Filing Deadline?
Section 1031 exchanges must be completed within 180 days after the sale of replacement property. The exception is when the April income tax filing deadline falls within that 180 day period, in which case the April filing deadline trumps the 180 day deadline. In other words, your 1031 closing deadline is now the April tax filing deadline. To realize the full 180 day exchange period, you must file an extension with the IRS. If you already filed your tax return, you can still claim your 1031 exchange on an amended tax return. Your best idea is to discuss this with your CPA or tax advisor, as well as your Qualified Intermediary, immediately.
3What Is A "Reverse 1031 Exchange?"
Reverse exchanges are commonly structured under the guidelines set forth under IRS Revenue Procedure 2000-37. A safe harbor is available for reverse exchanges under the following conditions: The replacement property is purchased in the name of an "exchange accomodation titleholder" (EAT), which is an LLC formed by 1031trx LLC for the purpose of holding title to the property (e.g., "parking" the property). The EAT borrows money from the exchangor (and/or a lender) to acquire title to the replacement property and then holds title to the replacement property until the eventual sale of the relinquished property. The relinquished property is identified within 45 days of the purchase of the replacement property. The relinquished property must be sold within 180 days of the purchase of the replacement property. Revenue Procedure 2000-37 prohibits the exchangor from having ownership of the relinquished and replacement property simultaneously. The exchanger must have the funds available to purchase the replacement property before selling the relinquished property (if financing, the lender must be willing to lend the money to the EAT for the purchase). 1031trx LLC creates a lease between the EAT and the exchangor so the exchangor has access to the parked property until the 1031 reverse exchange is finalized.
4Can Mixed-Use Property Qualify For 1031 Exchanges?
Yes. Mixed-use property (e.g., property that the taxpayer uses for both income production/investment and for personal residence) may qualify for a tax-deferred 1031 exchange. A careful valuation that separates the business value from the personal residence value is necessary. Only the income producing/investment portion of the property may be exchanged and the replacement property must be like-kind property used for income production or investment. The same exchange requirements must be met with respect to that tax-free exchange, and another mixed-use property may even be purchased as long as the rules are followed. As for the personal residence portion of mixed-use property, Section 121 exempts up to $250,000.00 of gain from taxation ($500,000.00 for a married couple filing jointly). The taxpayer must have lived in the residence for 2 of the last 5 years and may only claim this exemption once every 2 years.
5Do Vacation Homes Qualify As 1031 Exchange Investment Property?
Generally, no. Residences held solely for personal use (i.e., never rented out) are not 1031 exchangeable. However, IRS Revenue Procedure 2008-16 states that a vacation home qualifies as eligible 1031 exchange investment property if:
- it is owned by the taxpayer for at least 2 years prior to or after the 1031 exchange period; and
- in each of those 2 years, it was rented out for 14 days or more at fair market rent and personal use of these vacation homes must be no greater than 14 overnights or 10% of the days rented per year. If maintenance is performed when staying at the investment property, those overnights are not counted towards the 14 overnights permitted.
6When Can An Exchange Receive Funds From The 1031 Exchange Account?
Sometimes, investors decide not to proceed with the 1031 exchange after selling the relinquished property -- or they have acquired some replacement property and decide not to acquire additional property with their relinquished property sale proceeds. They then, understandibly, expect the immediate return of the proceeds. A Qualified Intermediary is generally only able to release the proceeds to the exchanger upon the expiration of the 180 day exchange period; if no replacement property is identified within 45 days; or upon the acquisition of all identified replacement property to which the exchangeris entitled under the exchange agreement. Otherwise, a Qualified Intermediary may only release the proceeds when a material substantial contingency to purchasing identified replacement property occurs, which is beyond the control of the exchanger and disqualified persons.
7Crowdfunding 1031 Exchanges; Can It Benefit A 1031 Exchanger?
Crowdfunding is the funding of a large project by raising money from a group of individual investors via a third-party platform. The JOBS Act now permits crowdfunding platforms to raise funds through the sale of securities to both accredited investors and non-accredited investors, without having to register with the SEC, under certain circumstances. On October 30, 2015, the SEC eased the restrictions on crowdfunding platforms' ability to reach non-accredited investors. Households with an income of less than $100k can invest the greater of $2k or 5% of its net worth or annual income. Households with an income of more than $100k can invest 10% of the lesser of their net worth or income per year, but not more than $100k. Real estate crowdfunding platforms can assist 1031 exchangers with partial interests in large investment projects, still qualifying as 1031 replacement property. See the latest updates on real estate crowdfunding here.
8Are There Restrictions On Who Can Act As Qualified Intermediary?
Yes. The Qualified Intermediary cannot be a "disqualified person" as defined by § 1031. A "disqualified person" includes any agent of the exchanger, such as his or her employee, attorney, accountant, investment banker or broker, or real estate agent or broker within two years of the taxpayer’s transfer of relinquished property. Generally, a person that is related to a disqualified person is also considered a disqualified person (e.g., ancestors, lineal descendants and siblings). To read more about how the IRS defines "disqualified person," click here.
9Does 1031 Have A Place In Estate Planning?
Yes. First, understand "step up in basis" permits an heir to inherit the asset with its basis being the value at the time of inheritance as opposed to the value it was originally purchased at by the deceased (i.e., asset stepped up to the fair-market value at the time of death), thus minimizing the gains tax upon resale. Example: You purchased a building in 2000 for $500K and then die in 2015 when it's valued at $2M. Your heir takes basis in the building at $2M and can sell it for $2M, paying no gains tax. 1031 exchanges are useful when a deceased real estate investor leaves investment properties to his or her heir, who then exchanges them for one more manageable investment property. Similarly, multiple heirs to an investment property may not all want to be an investor, so they could all sell the investment property and the investor-types can do a 1031 exchange with their portion of the proceeds. Also, if an investor dies having done a 1031 exchange, no obligation to pay a capital gains tax is ever passed on to his or her heirs.
10Can I Buy A Tenant-In-Common Interest Property?
Yes. An exchanger/investor can purchase a tenant-in-common interest and have it qualify as investment property. TIC interests show up in warehouses, storage units, hotels, office complexes, hospitals assisted-living facilities, and apartment buildings. The vast majority of TIC offerings are made to "accredited investors" only, which means that certain financial criteria must be met.
11Can I Do A 1031 Exchange By Buying Into REIT?
No, but there are other similar options. An REIT is an entity that owns/manages real estate portfolios and issues shares to investors. Although the REIT owns real estate, you're buying corporate stock (which isn't "like-kind" to real property). Alternatively, the 1031 exchange replacement property may consist of an interest in a Delaware Statutory Trust (DST) or an Illinois Land Trust (land trusts), both of which are fractional interests treated as "like-kind property" to a regular fee interest in investmentment real property.