1031 Exchange Questions

[Katlynn Teague]

Good morning BP,

I am curious about 1031 Exchange and have a couple of questions. 

How did you start using 1031? What are the benefits? Are there rules associated with 1031 or any specific guidelines that need to be followed? How do you like using 1031? 

These questions are because an agent in my office has a buyer who purchases every property through 1031. One of the buyers I work with is looking to get into 1031 and they purchased a property from me back in February of this year. The agent called me asking if they would be able to use 1031 on this property. I referred them to a 1031 advisor, to answer their questions and run them through the process. 

I know little to nothing about 1031 and wanted to ask the experts on here, to have more insight. 

[Randy Rodenhouse]

The 1031 exchange process is a tax strategy designed for real estate investors who want to sell one property and buy another without immediately paying capital gains taxes on the profit they made from the sale.

In simple terms, here's how it works:

1. Who is it for? The 1031 exchange is for real estate investors who own investment or business properties (like rental properties, commercial buildings, or vacant land) and are looking to reinvest the proceeds from the sale into another property of equal or greater value.
2. Selling the Property: When the investor decides to sell their property, they must identify and inform the IRS about potential replacement properties within 45 days of the sale. This list can include up to three properties, but they must eventually choose one from that list.
3. Timeframe for Buying: After selling their property, the investor has a strict timeline of 180 days to complete the purchase of the replacement property or properties. The clock starts ticking from the day the original property was sold.
4. Like-Kind Exchange: To qualify for a 1031 exchange, the replacement property must be of "like-kind" to the property being sold. In this context, "like-kind" means similar in nature, not necessarily identical in type.
5. Using a Qualified Intermediary: To facilitate the 1031 exchange, the investor cannot directly touch the sale proceeds. Instead, they use a Qualified Intermediary (QI) - a neutral third party - who holds the funds during the process and ensures they are reinvested into the new property.
6. Reinvesting All Proceeds: To defer all capital gains taxes, the investor must reinvest all the proceeds from the sale of the original property into the new property. Any leftover money will be taxable.
7. Tax Deferral: By following the 1031 exchange process and meeting all the requirements, the investor can defer paying capital gains taxes on the profit from the sale of the original property until they eventually sell the replacement property for cash without doing another 1031 exchange.