These 1031 Exchange FAQ could help with your next 1031 Exchange:
What is a Delayed 1031 Exchange?
A tax-deferred exchange, better known as a Delayed 1031 Exchange requires an Exchanger to dispose of an investment property and acquire a replacement property. It allows an Exchanger the freedom to perform property related transactions on different dates.
How is a Delayed Exchange beneficial?
It allows an Exchanger to defer federal capital gains taxes, state taxes in several states, as well as depreciation recapture tax. Additionally, it allows Exchanger to reinvest the sales proceeds instead of paying capital gains taxes.
What is the maximum time limit to complete a Delayed Exchange?
The timeline set by code is completion within 180 days.
What is the maximum time limit to identify the replacement property under a Delayed Exchange?
Tax code allows an Exchanger to identify the replacement property within 45 days from the date of transfer of the relinquished property.
What are the 1031 Delayed Exchange property identification rules?
A delayed exchange allows Exchangers to identify one or more replacement properties under three different rules:
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- Three-property rule
- 200% of Fair Market Value rule
- 95% rule
What is the Three-property rule?
It allows an Exchanger to identify, at most, three potential like-kind replacement properties. It sets no restriction on the market value of the identified like-kind replacement properties. This delayed exchange rule is the most common and simplest of all the identification rules.
What is the 200% rule?
In this rule, the number of potential like-kind replacement properties to be identified may exceed three, provided that all the identified properties have a total fair market value (FMV) less than 200% of the sales price of the relinquished property.
What is the 95% Exception Rule?
If an Exchanger identifies like-kind replacement properties that do not meet both the two rules mentioned above, i.e., the Three Property rule and 200% rule, then property identification defaults under the 95% rule. It requires the Exchanger to acquire at least 95% of the FMV of the identified replacement property.
What is “like-kind” property?
Any property that is considered as a real property under the tax code which qualifies as “like-kind” property and hence eligible for use in a 1031 delayed exchange.
Which real property can be considered as “like-kind’?
Any real property within a class of assets, in use for commercial purposes qualifies as “like-kind”. For example, a commercial building can be exchanged for a residential condo building. Effective, January 1, 2018, exchanges of machinery, equipment, vehicles, artwork, collectibles, patents and other intellectual property and intangible business assets generally do not qualify as like-kind exchanges. However, certain exchanges of mutual ditch, reservoir or irrigation stock are still eligible for like-kind exchanges. Also, a property inside the United States is not “like-kind” to a property outside the United States.
What is the first step for structuring a Delayed 1031 Exchange to defer capital gains taxes?
In order to defer capital gains taxes using a Delayed 1031 Exchange, an Exchanger should first enter into a contract with the buyer regarding the sale of a relinquished property. Such a contract should include a “cooperation clause” that binds the buyer to cooperate in structuring the transaction as a deferred exchange.
What is the role of Delayed 1031 Exchange intermediaries?
Delayed 1031 Exchange intermediaries or Qualified Intermediaries help significantly in the tax-deferred exchange process, especially with the documentation that the Exchanger needs to submit to the IRS before the closing date of the relinquished property.
Which documents are necessary for the property being relinquished in a Delayed 1031 Exchange of properties?
The following documents must be filed for a Delayed Exchange:
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- Assignment of the Relinquished Property Purchase Contract to assign the rights of seller to the Qualified Intermediary
- An Exchange Agreement
- A Notice of the Assignment to be delivered to the to the buyer
- Instructions to accomplish the transaction with a settlement agent
When is the right time for an Exchanger to identify a replacement property?
After the sale of relinquished property is closed, the QI holds the proceeds and ask the Exchanger to identify suitable “like-kind” replacement properties within an identification period of 45 days.
What is the next step after the Exchanger has identified a like-kind replacement property?
The Exchanger enters into a ‘Purchase contract’ with the seller of the replacement property. This contract should include a ‘cooperation clause’ that obligates the seller to cooperate in the former’s cause of completing the tax-deferred exchange.
What documents are required to complete the replacement property exchange?
The QI prepare several documents on behalf of the buyer such as ‘Assignment of the Replacement Property Purchase Contract’, ‘Notice of the Assignment’, and instructions to complete the transaction with a settlement agent. All these documents must be signed on or before the closing date. The closing should take place within the exchange timeline of 180 days.
Which documents are required to report the transaction as a Delayed 1031 Exchange?
A Delayed 1031 exchange must be reported by completing Form 8824 and filing it along with the Exchanger’s federal income tax return. If the Exchanger completed more than one exchange, a different form must be completed for each exchange. It is very important that Form 8824 be filed, since the settlement agent will file a 1099-S upon the closing of the relinquished property.
Contact the Triple Net Investment Group today. we can assist you in locating a like-kind property for your 1031 exchange and also ensure a smooth and successful transaction.
