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Frequently Asked Questions

What are the general procedures to follow when doing a 1031 exchange?
What kind of property qualifies for an exchange?
Why do I need a Qualified Intermediary or Exchange Accommodator? 
Does it matter how title is held on the property?
What are the 45-day and 180-day deadlines?
How many properties can I identify as replacement property?
What happens to my money during the exchange?
Do I have to reinvest all of the money?
Can the proceeds from the relinquished property be used to make improvements on the replacement property?
What is boot?

What are the general procedures to follow when doing a 1031 exchange?

The golden rule to remember in exchanging is “equal to or greater than”. When choosing replacement property, you must ensure that the fair market value, equity, and debt all must be equal to or greater than that of the relinquished property. Additionally, all of the proceeds received from the relinquished property must be used in acquiring replacement property.

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What kind of property qualifies for an exchange?

1031 exchanges involve like kind property. This can be real or personal property of the same nature or quality. Real property must be held for investment or the productive use in a trade or business. This excludes personal residences, however, the investment portion of a mixed use property can qualify for an exchange. Personal property must be either in the same General Asset Class or Product Class. Please contact us if you are unsure if your property qualifies for a 1031 tax-deferred exchange.

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Why do I need a Qualified Intermediary or Exchange Accommodator? 

For a valid exchange, the taxpayer must not have actual or constructive receipt of the proceeds from the sale of the relinquished property. The QI or Exchange Accommodator is a safe harbor created by the Treasury Regulations. If the taxpayer meets the requirements of this safe harbor, the IRS will not consider the taxpayer to be in receipt of the sales proceeds.

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Does it matter how title is held on the property?

The proper vesting is important when exchanging your investment property. You must hold title to the replacement property exactly as you held title to the relinquished property. Please let us know if your lender requires different vesting.

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What are the 45-day and 180-day deadlines?

From the day that you close escrow on your relinquished property, you have 45-days to identify the properties you intend to purchase and you have the earlier of 180-days or the due date to file your tax return to complete the acquisition of your replacement property. There are no extensions and these deadlines still apply even if they fall on a weekend or holiday.

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How many properties can I identify as replacement property?

There are three rules that apply when identifying replacement property. The taxpayer must meet the requirements of at least one of these rules:

• 3-Property Rule: The taxpayer may identify as many as three properties, regardless of their total value; or

• 200% Rule: The taxpayer may identify any number of properties, provided their aggregate fair market value does not exceed 200% of the aggregate fair market value of all your relinquished property.

• 95% Rule: The taxpayer may identify any number of properties, provided they acquire replacement property with an aggregate fair market value equal to at least 95% of the aggregate fair market value of all the identified properties.

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What happens to my money during the exchange?

There are certain restrictions on the use and release of your exchange proceeds. The proceeds from the sale of your relinquished property may not be used for any purpose other than acquiring property designated like-kind replacement property.

These proceeds are held in an interest bearing account until the use of the funds is designated. Once an exchange is in place, you will not have access to the funds. If you decide not to complete your exchange and have not identified replacement property, you can receive the proceeds only after the 45^th day. If you have already designated property, then you must wait the full 180 days before you can receive the funds.

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Do I have to reinvest all of the money?

In order to complete a 100% tax-deferred exchange, the Exchanger must reinvest all of the exchange proceeds from the relinquished property into properly designated replacement property that has an equal or greater fair market value. The property must also take on an equal or greater amount of debt. If there is less debt taken on the property, than an additional amount of cash equal to the amount of debt relief is required.

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Can the proceeds from the relinquished property be used to make improvements on the replacement property?

Yes, this is known as a Build-to-Suit or Construction or Improvement Exchange. The taxpayer is not allowed to build on the property once it is already owned. Therefore, an unrelated party must take title to the replacement property, make the improvements, and convey title to the taxpayer before the end of the exchange period.

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What is boot?

Sometimes, it is desired that the exchange is only partially tax-deferred. If there is any “cash boot,” meaning money that is received by the exchanger and not reinvested, then the total boot amount will be taxable. For real property sold in the State of California, 3 1/3% of the total boot must be withheld and remitted to the Franchise Tax Board. “Mortgage boot” can also occur when you pay off the debt on the relinquished property but you do not get a loan for equal or greater value on the replacement property. Boot can also be any type of replacement property received that is not of like kind.

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