1031 Frequently Asked Questions

Who should utilize a 1031 exchange?

Any taxpayer who is going to sell investment property (Property held for trade or business) and is going to reinvest the funds into replacing that property with other real property.

What is a 1031 Deferred Exchange?

A deferred exchange is where a property owner trades one property for another without having to pay any federal income tax. The tax from this sale is deferred until a future date. This type of exchange is authorized by Section 1031 of the lnternal Revenue Code.

What type of exchanges are there?

Direct Exchange:

Seller and Buyer swap properties between themselves. This does not happen often.

Deferred Exchange:

This is where a seller hires a Qualified lntermediary to handle the exchange. The taxpayer then has 45 days from the closing of his relinquished property to designate replacement property and close within 180 days (from the sale date) or when the taxpayers tax return is due with all extensions.

What type of property can be exchanged?

If the taxpayer is selling an investment property which is a house, condominium, or commercial property they can purchase replacement property which is any of those types of property as long as they are investment properties. It does not require that the taxpayer sell a house and buy a house or sell a commercial property and buy a commercial property. Also relatively new to the market is what now is called a DST or Delaware Statutory Trust which also qualifies. Primary homes cannot be exchanged. Vacation homes have certain restrictions on them if they are to qualify.

What are the time frames for the taxpayer?

The taxpayer has 45 days from the date they close on the relinquished property to designate replacement property and 180 days to close on the property or when the taxpayer files his tax return with extensions from the date of the closing. These are exact dates and normally will not change. However, over the past few years Florida had some natural disasters (such as hurricanes) when the IRS has allowed these dates to change if the taxpayer is in an effected area.

Who are the parties to the exchange?

Seller: Taxpayer or Exchangor

Buyer: Party that buys the seller property.

Ql or Qualified lntermediary: The Ql assists the party and escrows funds for tle Exchangor. The Ql cannot be related to the taxpayer or his Attorney or CPA. Also note there are certain rules when the seller is selling to a related party or a related entity.

How do you designate replacement property?

Our company will provide you with a form to use to designate. There are certain rules when you designate. One rule states that you can designate up to 3 different replacement properties no matter their value. (3 property rule).

The second rule states that you can designate more then 3 properties but you have to list the value of the properties and they cannot exceed 200% of the sale price of the relinquished property.

What happens to exchange funds when you close on the sale of the relinquished property?

Prior to the closing the Ql will prepare an escrow agreement with the taxpayer. The taxpayer can not take the funds from the closing or the 1031 is over.

The funds from the sale then go to the Ql. Our firm then opens up a separate interest bearing escrow account for each exchange except when the closing of the relinquished property and the replacement property will take place within a short period of time.

What is a reverse exchange?

A reverse exchange is where you purchase the replacement property prior to selling your relinquished property. lt is much more complicated then a regular or forward exchange.

Why use Equity Exchange as your Ql?

We have experience and have assisted taxpayers in over 6,000 exchanges. Our firm opens a new exchange account for each exchange. Your funds are not co-mingled with anyone else’s funds. You also get a bank statement each month showing the activity on your account.

If you are interested in using our services you can request a form that you can fill out and return to us  along with the contract for the property you are selling. If you wish to discuss it more just call us.