When you need answers to your questions about 1031 Exchanges, we’re here for you. Browse our FAQs, read our case studies, understand the types of exchanges and then call us about your specific situation. The simplest way to get answers is to ask the questions!
General 1031 Exchange Questions
Who is the Qualified Intermediary?
The qualified intermediary (QI) is the independent third party required by the IRS to act as the middleman in both the sale and purchase transactions. The QI cannot be the taxpayer, a descendant of the taxpayer, or an agent of the taxpayer (realtor, attorney, accountant, etc.). The QI's role is to prepare the exchange documents, coordinate with the closing agents for each transaction, and escrow the funds.
What is considered investment or business use real estate?
There are a number of options available to investors looking to exchange into like-kind properties. Here is list of some of those options:
- Rental properties
- 30-year leases including options
- Raw land
- Office buildings
- Shopping centers
- Trailer parks
- Retail stores
Are there any other benefits to a 1031 exchange besides tax deferment?
Yes! Here are five benefits of doing a 1031 exchange besides tax-deferment:
What is a Certified Exchange Specialist® (CES®), and what is the importance of one?
The CES® designation was established in 2003. It is recognized as the mark of professionalism and knowledge in the 1031 exchange industry. To earn the designation, candidates must demonstrate knowledge of exchange rules and competency in performing the critical and ethical activities of a qualified intermediary. The CES® exam also assesses the candidate's proficiency not only in theory but also in practice.
A CES® Designee is among an elite corps of exchange practitioners in the United States and is an invaluable resource to his or her clients during the exchange transaction. Once earned, there is a strong commitment to continuing education to keep abreast of changes in such an evolving and dynamic industry.
Why Select a Certified Exchange Specialist® to Facilitate your 1031 Exchange?
The Federation of Exchange Accommodators (FEA) administers a voluntary certification and continuing education program that awards the professional designation of Certified Exchange Specialist® (CES®). Those individuals who meet specific work experience criteria and pass a comprehensive examination on exchange laws and procedures are awarded the CES® designation.
Certified Exchange Specialists®:
- have demonstrated, through years of service and a comprehensive examination, that they possess a high level of knowledge and experience;
- are committed to the professionalism, high standards of conduct, and ethical business practices of the 1031 exchange industry;
- continue to stay current with changes in IRC § 1031, relevant regulations, case laws, and other developments affecting your exchange; and
- must meet an on-going continuing education requirement set by the CES® Council.
Because Section 1031 exchanges are complex transactions, the CES® designation is an important indicator of an accommodator’s experience and knowledge. It demonstrates to a property owner considering an exchange that the professional they have chosen has met the key criteria necessary to perform exchange transactions accurately and ethically.
Midland 1031 is proud to have two CES® designees on staff.
What does the verbiage on the contract need to say?
LANGUAGE FOR SALE OF RELINQUISHED PROPERTY:
“Buyer is aware that Seller has the option to qualify this transaction as an Internal Revenue Code Section 1031 tax-deferred exchange. Seller requests Buyer’s cooperation in the event of an exchange and agrees to the assignment of this contract to Midland 1031, LLC by the Seller. Seller agrees to hold the Buyer harmless from any and all claims, liabilities, and costs of such an exchange.”
LANGUAGE FOR PURCHASE OF REPLACEMENT PROPERTY:
“Seller acknowledges and agrees that the Buyer may engage in a deferred or reverse exchange of like-kind property utilizing a qualified intermediary (QI) or an exchange accommodator titleholder (EAT) pursuant to Section 1031 of the Internal Revenue Code of 1986, as amended, and the Treasury Regulations, revenue procedures and other guidance promulgated thereunder. Notwithstanding any provision herein to the contrary, in the event the Buyer elects to engage in a deferred or reverse like-kind exchange, the Seller agrees to consent to the assignment of Buyer’s rights under this Agreement to a QI or EAT to facilitate such deferred or reverse like-kind exchange.
Seller further agrees to execute any and all documents reasonably necessary to consummate the purposes of this section. In the event Buyer engages an EAT for its exchange, Seller agrees to transfer legal title to the property to such EAT pursuant to instruments of transfer otherwise complying with the terms of this agreement. Any assignment by the Buyer in conformance with this section shall be at the cost of the Buyer. Such assignment shall not relieve Buyer of any of its obligations (including any post-closing obligations) or liabilities under this Agreement or delay the closing hereunder."
How do I start an exchange?
Call us at (239) 333-1031. We can answer any questions you have. Once you are ready to start, complete the client information form and upload a copy of the fully executed contract for your relinquished property. Start your exchange today by filling out this form.
Will a 1031 Exchange really save me money?
How do I calculate my capital gains?
To get an idea of your capital gains, please use our online Capital Gains Calculator. We always recommend that you consult with your CPA or tax advisor to calculate your exact capital gains.
When calculating the net selling price, do I get to take my initial investment into consideration? What about expenses or improvements made before selling? Can I pay myself back for those items?
To have a fully tax-deferred exchange, the taxpayer must trade up or equal both value and equity from the relinquished property to the replacement property. Taxes will occur on the greater of these values only to the extent of the realized gain from the exchange. If you take any cash out at closing, it is categorized as the taxable boot. We encourage you to discuss this with your tax advisor as they may know of tax deductions to offset the taxable boot.
I know that I have to replace the debt on my relinquished property. Does that mean I have to get another loan for the new property?
No. While you have to replace the loan value, you accomplish this by getting a new loan, bringing additional cash to the table, or a combination of the two.
All of the properties that I see are nowhere near the Net Selling Price of my relinquished property, but they could all use a substantial amount of work. Could I use some of the exchange proceeds to do the work on the property after closing?
Once you close on the purchase of the replacement property, any improvements made to the property will not be sheltered in the exchange or count towards the replacement property value. However, you can set up an Improvement Exchange where we act as the titleholder to the property while the improvements are in progress. Doing this would allow you to include improvements made in the replacement property value.
If my exchange falls through, when will I get my money back?
Until Midland 1031 receives the exchange proceeds from the sale of your relinquished property, we cannot pay Exchange Funds to you until:
- The 45-day identification period has expired, and no identification was made (or property identification was revoked before the 45th day); or
- You identified property within 45 days and closed on ALL the identified property; or
- The 180-day exchange period has expired.
What is the timeline of a 1031 Exchange?
What are the timing rules?
There are two essential timing rules for 1031 exchanges, the 45-day rule, and the 180-day rule. You have 45 days to identify your replacement properties, and you must close on all intended properties within 180 business days. The timeline starts the day you close on your current investment property. You must contact Midland 1031 before closing.
When you say I need to “identify” my replacement property, does that mean that I have to be under contract by the 45th day?
No, you only have to provide us with the addresses of the properties you consider as replacement property by the 45th day. However, only properties identified by the 45-day deadline qualify for the exchange. If any of those properties fall through after day-45, you cannot identify additional properties. For this reason, we encourage you to get as far along in the process (i.e., going under contract) during those 45 days.
What if I can’t identify any properties by day 45?
If you do not identify properties before midnight of the 45th day, the exchange is canceled. If this happens, the exchange proceeds return to the taxpayer.
What if day 45-day or 180-day deadline falls on a holiday or weekend?
The calendar determines the 45-day and 180-day deadlines. If one of these deadlines fall on a weekend or holiday, that remains the deadline.
What if I miss the 180-day deadline?
Unfortunately, there are no extensions to the exchange deadline. Federally declared disasters are the only current exceptions that would grant an extension.
How do I take title in a 1031 Exchange?
What is the same taxpayer requirement?
The taxpayer that holds title to the relinquished property must acquire and take title to the replacement property. For example, if a partnership owns the relinquished property, the partnership is the taxpayer who is completing the exchange, not the individual partners. There must be a continuity of the taxpayer from beginning to end.
You mentioned that there must be continuity of taxpayers from start to finish. Will I ever be able to make changes to the taxpayer on the title?
Because of the same taxpayer requirement, many exchangers want to know when it is safe to change the title on the replacement property's deed. Changing the title usually occurs when one spouse completed the exchange but wants to add the other spouse. Changing the title is also common when an individual wants to add additional partners or change from one entity to another.
The tax code does not explicitly address the holding period requirement before changing ownership. However, Section 1031 requires that the property you sold and the property you purchase be held for investment or business-use purposes. The taxpayer who did the exchange must continue to hold the replacement property for investment or business use. If the taxpayer on the title changes after the transaction, the IRS may see this as inconsistent. This perceived inconsistency could jeopardize the exchange. Remember, the burden of proof falls on the taxpayer. The taxpayer must prove their intent with the property before and after the exchange.
"Old and Cold" Rule
Many tax advisors suggest that the exchange be ‘old and cold’ before considering transitioning the property into new ownership. How much time is enough to be considered ‘old and cold’? Two years is a good rule of thumb, conservatively speaking. However, tax advisors may accept one year and a day.
Not all 1031 Exchanges are alike. You should seek a tax professional's advice before you change ownership of a 1031 replacement property.
I understand that there has to be continuity of the taxpayer. Does that mean that I cannot purchase the replacement property with anyone else?
No. However, you need to ensure that the correct taxpayer takes title to its percentage interest in the property. Be careful not to inadvertently create a new, separate taxpayer during the process (i.e., LLC, Partnership). You also need to ensure that the taxpayer acquires enough interest in the property to equalize the exchange.
I don't plan to live in the replacement property, but I plan to rent it to my son. That still works, right?
It works as long as you treat them as you would any other unrelated tenant, especially ensuring that they pay fair market rent.
Will my vacation rental qualify for a 1031 exchange?
Vacation rentals qualify for a 1031 exchange if they have been rented at fair market rates for at least 14 days each 12 months for at least two years before the sale. During these two years, personal use of the vacation rental cannot exceed 14 days (if rented 14 days) or ten percent of the number of days rented each year.
Download our 1031 Exchange Guide
We have a comprehensive 1031 Exchange Guide for you. It's full of details to walk you through the exchange process from start to finish.