Basic Pointers About 1031 Exchanges

To defer all of the gain, and thus defer the taxes, the Seller (i.e., Exchanger) needs to do three things (personal primary / short-term / flipped property do not qualify):

Purchase replacement property (it’s possible to buy multiple properties) in total that is equal or greater in value;
Reinvest all of the equity (net process from the sale) into the replacement property; and
Obtain the same or greater debt on the replacement property, but debt may be replaced with additional cash from various sources including traditional financing, taxpayer’s own cash, seller financing or private money Loan.

It is possible for the seller to do a partial exchange, either buying down in value and/or keeping some of their cash/equity, and paying the taxes on only that amount (“boot”).

In the Delayed Exchange Structure, the Exchanger has 45 days from the transfer of the sale (relinquished) property to identify replacement property and up to 180 days to purchase any of the identified replacement property. The 180 days is exact and there are no additional days for weekends and holidays.

FIRPTA:

If the taxpayer is a foreign person, he or she must consult with a tax advisor and analyze if FIRPTA applies to the transaction and determine if he or she is considered a “Foreign Person” who is selling a U.S. real property interest.

What kind of property qualifies for a 1031 Exchange?

Any property held for productive use in a trade or business or for investment can be exchanged for like-kind property. “Like-Kind” refers to the nature of the investment. Any type of real property can be exchanged for another type of real property. For example: A single family rental can be exchanged for a duplex. Raw land can be exchanged for a shopping center or an office space for apartments. Any combination will work. This gives the investor flexibility to change investment strategies to fulfill their portfolio needs.

What does not qualify for a 1031 Exchange?

A personal residence, developed lots, home flipping, partnership interests or property held for resale immediately after acquisition. Second homes may or may not qualify depending upon the use and how it’s reported for income tax purposes.

Related Parties

Related parties are defined in IRC §267(b) and §707(b)(1) as persons or entities bearing a relationship to the Exchanger, such as certain members of a family (brothers, sisters, spouse, ancestors and lineal descendants); a grantor and fiduciary of any trust; two corporations which are members of the same controlled group; and corporations and partnerships with more than 50% direct or indirect common ownership in the entities. It is more likely for an exchange to be disqualified when acquiring a replacement property from a related property. The IRS looks at the related party and the investor party as one economic unit, and does not like to see the investor get tax deferral while the related party cashes out. An exception to this has been when the taxpayer acquires a replacement property in an exchange from a related party who is also doing an exchange.

[The above are only pointers and stated in a general fashion for informational purposes. Bixel Exchange does not provide tax or legal advice. Please consult with your tax advisor or attorney to structure the correct transaction and proper tax planning. Bixel Exchange provides a wide variety of services related to comprehensive 1031 Exchange transactions acting as a Qualified Intermediary (Accommodator) covering all 50 states (nationwide) with full capabilities to engage in simultaneous, deferred, forward, reverse (Build-To-Suit) or construction exchanges.]

For more information, please contact:

H. Sean Dayani, Esq., the Director of Exchange Services

Email: hsd@bixeladex.com

Tel: (310) 435-5427