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1031 Tax Exchange FAQs
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Why would someone want to do a 1031 Exchange?
To defer capital gains tax on the sale of commercial, business, or investment property.
Is a 1031 Exchange a gimmick or loophole in the Internal Revenue Code?
No. Section 1031 has been a part of the Internal Revenue Code since the inception of the Code, during the 1920’s. |
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Is 1031 only for capital gains?
No. Section 1031 applies to capital gains taxes (15%), depreciation recapture (25%), and state income taxes (generally 8% to 9% where applicable). Long-term capital gains taxes apply to property held over 1 year – gains from property held less than a year are typically taxed as ordinary income.
How long must I hold my current property in order for it to qualify for a 1031 Exchange?
Property involved in a 1031 Exchange must be held for “investment or productive use in a trade or a business.”
When looking at “investment intent” the courts will often look to the period of time over which the property is held. That said, there is no specific holding period requirement for either the relinquished or replacement property.
Taxpayers who hold their relinquished property for two years satisfy the requisite intent for a 1031 Exchange (or two tax reporting periods, since in an audit the IRS may look backwards and forwards two tax returns). A holding period of over a year has generally been accepted, but may be subject to review by the IRS. A much shorter holding period has been accepted, where a change in circumstances indicates that the taxpayer had intended to hold the property for a longer period. The IRS will look at ‘investment intent’ and will call a taxpayer quickly flipping property a ‘dealer’ vs. an ‘investor’.
Do I have to know what property I will be purchasing when I start the exchange?
No. You have 45 days from the sale of your relinquished property to identify your potential replacement properties.
How many potential replacement properties may I identify?
3-property rule: You may identify up to 3 properties without regard to their value.
200% rule: You may identify more than 3 properties provided that their combined fair market value does not exceed 200% of value of the relinquished property.
95% rule: You may identify any number of properties, provided that you acquire 95% of the fair market value of those properties.
May I do a 1031 Exchange, and later move into the replacement property as my personal residence?
You cannot purchase the replacement property with the intent to move into it as a personal residence. If, however, you hold the replacement property for a sufficient time to establish the requisite intent for a 1031 Exchange, then you may move into the property and thus change the nature of the use of the property.
After moving into the property, a taxpayer may look to take the Section 121 exemption for personal residences. Under the recently enacted law, to gain the 121 exemption, the property must not have been the subject of a 1031 Exchange in the previous 5 years (that is, 5 years from the closing of the phase 2 acquisition).
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1031 Tools & Resources
- 1031 Video Overview- Discover valuable information as we walk you through the mechanics and benefits of 1031 in a short 7 minute video presentation.
- 1031 Calculator- Use our calculator to see how a 1031 Exchange can maximize investor leverage.
- 1031 Handbook- Order your free “Guide to Wealth and Growth through 1031 Exchanges”.
- Listen to 1031 Audio Topics- Learn as you listen to exchange experts discuss basic & advanced subjects.
- Register for a 1031 Webinar- It’s a great way to get answers to your own 1031 questions.
Start a 1031 Exchange Online! or Call (866) 903-1031 Today!
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