1031 exchanges enable you to reduce or eliminate taxes on the sale of business or investment real estate. If you want to sell one business or investment property (the “relinquished property”) and purchase a “like-kind” replacement property, structuring these two transactions as a 1031 exchange can enable you to avoid capital gains tax and depreciation recapture tax.
1031 exchanges can be easy to do — but there are a number of rules that you should know about to maximize your chances of success:
1. 1031 Exchanges are Limited to Real Estate.
You may have heard of people exchanging things like cars, aircraft or patents, but those days are now behind us. As of December 2017, only business or investment real estate is eligible for a 1031 exchange.
Not too familiar with 1031 Exchanges? Read our 1031 Exchange Guide!
2. The Qualified Intermediary Needs to be Involved From the Very Start.
This is the quickest way to invalidate a 1031 exchange before it even begins.
Typically, a Qualified Intermediary (QI) serves as the custodian of the proceeds until they are reinvested in like-kind property to complete the exchange. But the QI is actually considered to be the person with whom you exchange your property. Without a QI (and an exchange agreement), there’s no exchange — just two independent transactions.
This means that you need to engage a QI before you sell your relinquished property to be eligible.
3. There’s More Than One Way to Exchange.
The most common structure is the 1031 forward exchange — you sell your relinquished property, then buy the replacement property afterward. A 1031 reverse exchange enables you to buy a new property first and sell yours later, giving you additional flexibility.
However, a reverse exchange is more complex than a forward exchange, and not all QIs have the experience necessary to facilitate them. This is one reason it can pay to select a QI carefully.
4. In a Forward Exchange, You Can Identify Multiple Potential Replacement Properties.
Within the first 45 days after you sell your original property, you may identify up to three potential replacement properties (or in the alternative, any number of properties so long as the value does not exceed 200% of the relinquished property value), and then use any of them — or even more than one of them (consistent with the identification rules) — to complete your exchange.
Even if you know exactly which property you want to buy as a replacement, it’s worth listing at least one additional property as a backup, in case your first choice falls through for some reason — and for maximum flexibility, consider listing an interest in a Delaware Statutory Trust (DST) as one of your candidate properties.
5. You Have 180 Days to Complete Your Exchange… Unless Your Tax Return Filing Date Comes First.
The clock begins ticking for completing your exchange on the day that you sell your relinquished property, and it stops at midnight on the earlier of:
- the 180th calendar day after the date of the sale, or
- the due date of your tax return.
However, you can file for an extension on your taxes and maximize your replacement period.
What can we help you exchange?
At JTC, we’ve put together an industry-leading track record of 1031 success, across tens of thousands of transactions and more than 25 years in the business. Members of our legal and Client Services team have decades of experience handling 1031 exchanges whom are also supported by our award-winning, cloud-based platform, called eSTAC®, which we built from the ground up to maximize your transaction security and transparency.