1031 exchanges are complex and often confusing. Here is a list of the most frequently asked questions we get about 1031 exchanges.
What are the benefits of a 1031 exchange?
There are many benefits to doing a 1031 exchange. The primary benefit is that a 1031 allows you to defer all the capital gains tax (and often state taxes) on your relinquished property, so long as you abide by the requirements.
What is Like-Kind Property?
In a 1031 exchange, your relinquished property and your replacement property must be like-kind. Like-kind properties have the same “nature or character,” even if they differ in grade or quality.
- Like-Kind Real Property: In the realm or real property the like–kind standard in broadly construed. For example, rural raw land in Texas may be exchanged for a condominium in New York City because they are both real estate, and any differences between them are merely in the grade or quality, not in character.
- Like-Kind Personal Property: Personal property (or chattel) is generally movable items that are not permanently affixed to the earth. For example a car, boat, or aircraft are personal property. Also, copyrights, patents, and licenses are also items of personal property. The like-kind standard for personal property is much more complex and restrictive. A boat is not like-kind to a book, and a crane is not like-kind to a rail road car. There are additional special rules and regulations for some types of tangible depreciable personal property.
More about like-kind property here.
What is the benefit of having a Qualified Intermediary?
A qualified intermediary can help walk you through the process of a 1031 exchange, answer any of your questions, and make sure you do not miss any of the deadlines for your exchange. They also work to shield you from retaining any of the capital gains from your relinquished property during an exchange.
Can my personal lawyer act as my Qualified Intermediary?
No. A qualified intermediary must be an independent third party. Anyone who has acted as your “agent” or is a “related party” to you is disqualified from being your qualified intermediary (“QI”). Anyone who has acted as your employee, attorney, accountant, investment banker or broker, or real estate agent or broker within the two year period ending on the date of the transfer of the first of the relinquished properties is considered to be your agent at the time of the transaction, and may not act as your QI.
How long do I have to complete the exchange?
1031 exchanges must all abide by the 180 day rule. Learn more about the 180 day rule and other deadlines here.
Is a 1031 Exchange a Loophole?
No, a 1031 exchange is not a loophole, nor is it considered cheating the system. Quite the opposite. Section 1031 has been a part of the IRS code for a very long time. 1031 exchanges are completely sanctioned – even encouraged – by the IRS and Congress.
How long does the property need to be rental property in order for the property to qualify under the 1031 exchange rules?
The typical safe answer is “the longer the better.” However, that is not much help for planning purposes. Another answer is that the taxpayer must have actually intended to hold the relinquished property for investment/business purposes (when it was disposed of) in order to qualify. Many tax professionals think that a year of qualified use for investment/business purposes is sufficient. I have always felt better with two years because of an old PLR that said two years was sufficient.