1031 Exchange FAQ
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1031 Exchange FAQ Guide: Things To Know Before Doing A 1031 Exchange
The 1031 exchange is a 100-year-old powerful tax treatment tool that requires you to sell your relinquished property and invest 100% of the proceeds in a like-kind replacement property to defer the capital gain taxes.
In addition to this, a 1031 exchange also allows you to replace your not-so-profitable relinquished property with a replacement property that comes with high returns.
And if you are planning to do a 1031 exchange, here are the most common 1031 exchange FAQ lists to help you through it.
Which Type Of Property Qualifies?
According to the rules defined by the IRS, investors can only replace like-kind investment property. However, like-kind refers to the nature of investment rather than the form of the property.
In short, a property should solely be held for investment purposes. This means you can exchange a multi-family property with an oil field or a commercial property. However, the property should not be used for residential purposes.
Also, you can not exchange notes, stocks, partnership shares, bonds or certificates of trust. Moreover, properties held “exclusively for sale” are not excluded. In real estate language, such properties mean they are purchased only to be sold again, like vacant land or a lot.
Lastly, a primary residence is excluded too.
How Do I Get Started With 1031 Exchange?
To get started with the process, you must connect with a 1031 exchange facilitator. However, before you make the call, be ready with relevant information like the name, business type, property type, address and required contact details of everyone involved in the process.
You will also be required to provide relevant information for the relinquished property you intend to sell and replacement property if you have chosen any.
The actual process starts when you sell the relinquished property. You get 45 days to identify up to three replacement properties and close the deal on all of them or either within 180 days of selling the relinquished property.
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How To Choose The Right 1031 Exchange Facilitator?
You can start your search by browsing online. If you need professional assistance, you can connect with our team of registered investment advisors to get the needed investment advice.
Another thing to consider: Ensure that the facilitator is not also working as an agent. That can be a major red flag. Also, make sure that the 1031 exchange facilitator you choose is well-versed in different types of 1031 exchange and has relevant knowledge in the alternative investment space.
Is There A 1031 Exchange Timeline?
The 1031 exchange timeline is perhaps the most important thing to consider. To set things straight, you get 180 days from the day you sell your relinquished property to complete the entire process. And this 180-day time period is divided into two time windows: a 45-day ID period and a 135-day closing period. In other words, you get 45 days from the day you sell your property to identify upto three like-kind replacement properties to reinvest your proceeds in. The remaining 135 days are provided once you complete your 45-day ID period. During this period, you must close on the chosen replacement property to successfully complete the process.
What Are The Restraints During The 45-Day ID Period?
During the 45-day ID period, you must list up to three replacement properties by providing an ambiguous description of all three. You can also provide a legal description or property address.
However, if you wish to purchase multiple properties, you must follow EITHER of the below-stated rules-
- Identify up to three replacement properties with the intention of buying at least one.
- Identify multiple properties as long as the aggregated value of all the properties does not exceed 200% of the fair market value of the relinquished property.
- Identify multiple properties as long as the aggregated value of the replacement properties does not exceed 200% of the fair market value and you intend you acquire at least 95% of all the properties.
Once it comes to the 1031 exchange faq and process, there are a lot of things you must consider. From finding the right replacement property within 45 days of selling the relinquished property to identifying only like-kind investment property, it is imperative to keep the rules and timelines in mind for a successful 1031 exchange.