Tools & Investment» Quick Reference
1031-FAQ's
What is a 1031 Exchange?
What is Revenue Procedure 2002-22?
What is "like-kind" property?
Can one do a 1031 Exchange with foreign property?
Can a (TIC) fractionalized co-ownership be considered for 1031 Exchange?
What are the identification and closing periods?
What does an Exchange Accommodator (Qualified Intermediary) do?
When will I have to pay taxes on the gains?
Who is eligible to do 1031 Exchanges?
An IRS Code 1031, which has become a popular real estate investment Strategy, 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. A property owner, that does not do a 1031 Exchange, is taxed on any gain realized by the sale of the property. In 1031 Exchange, some or all of the tax on the transaction is deferred until some time and action in the future, usually until the newly acquired property is sold without doing a 1031 Exchange. (Presently taxes can be deferred indefinitely doing successive 1031 Exchanges by relinquishing one and acquiring another).
What is Revenue Procedure 2002-22?
This is the new guidance from the IRS which makes it clearer and outlines how to structure a fractional-deed Tenants In Common (TIC) co-ownership of property by individuals who want to do a tax deferred 1031 Exchange.
'Like-kind' can be all types of Real Estate and can be exchanged for other Real property, such as vacant land for an apartment building or a rental home for a retail center as long as the guidelines are properly followed.
Can one do a 1031 Exchange with foreign property?
Presently only property located within the fifty United States and the U.S. Virgin Islands are eligible for a 1031 Exchange.
Can a (TIC) fractionalized co-ownership be considered for 1031 Exchange?
With the Proc. 2002-22 by the IRS in the year 2002, a Tenant In Common (TIC) fractionalized co-ownership interest is considered like-kind and qualifies for Section 1031 consideration. 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, but not personal property. (Please see “FAQ – Tenant In Common (TIC) )
What are the identification and closing periods?
The identification and closing periods are very strict time lines and limitations that have to be adhered to precisely. Once the property that an owner is selling has closed, s/he has 45 days from the date of sale to identify like-kind replacement property/s, which terminate at midnight on the 45th day following the transfer date. The property/s that has been identified, the owners have 180 days to close, which include Saturdays, Sundays or holidays.
You can select and identify several (or multiple) properties, and even change your mind about your choices during the period. However, you may ONLY acquire a property that was identified during the 45-day period, not after.
What does an Exchange Accommodator (Qualified Intermediary) do?
The Qualified Intermediary and the Exchange Accommodator is the same thing. They act as a “safe harbor” approved by the IRS to hold the exchange proceeds and to make sure that the structure of the exchange is properly observed. Note that there are many persons who are Disqualified by the IRS to act as Accommodator: your attorney, your accountant, your broker, investment banker, or a relative cannot perform the Exchange for you.
The Accommodator does more than just hold the money to avoid “constructive receipt”, they actually create the mechanism for a trade. In the case of a Reverse or Improvement Exchange, they provide a safe harbor for the title of the replacement property to be “parked” until the exchange is completed.
When will I have to pay taxes on the gains?
The taxes on the gains are ‘recognized’ when the owner disposes of the Replacement Property and does not get into another 1031 Deferred Exchange and that becomes a fully taxable transaction. If the owner continues to execute 1031 Exchanges, the gain may never be recognized and there are no time or number limits as to when and how many 1031 Exchanges one can do.
Who is eligible to do 1031 Exchanges?
Individuals, Corporations, LLC’s, and Partnerships are eligible to do 1031 Exchanges, providing it is ‘like-kind exchanges. Stocks and partnership interests are specifically excluded from being considered like-kind to real estate.
