FAQ
WHAT IS A 1031 EXCHANGE?
A 1031 exchange is a real estate transaction in which the taxpayer sells an investment or business property and uses the proceeds from the sale to acquire another property of equal or greater value. If done correctly, the taxpayer does not have to pay any capital gains taxes at the time of the exchange. Section 1031 of the IRS code states that "no gain or loss shall be recognized if property held for use in a trade or business or for investment is exchanged solely for property of like kind".
HOW DO I KNOW IF MY PROPERTY QUALIFIES FOR A 1031 EXCHANGE?
Both the property you are selling and the property you are acquiring must be held for use in a trade or business or for investment. "Held for investment" means that if the property is real estate and is improved, it must be rented. In the case of vacant land, it must be held for the purpose of increase in value.
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Both properties must also be "like kind". For real estate, this has a very broad meaning. It can be vacant land or improved property. It can be residential or commercial.
WHY DO I WANTÂ A 1031?
Utilizing a 1031 exchange means you don't leave money on the table. Why pay capital gains taxes if you don't have to?
IS THE 1031 EXCHANGE A DIFFICULT PROCESS?
If you hire an experienced, qualified 1031 intermediary, like Exchange Alliance, LLC, the exchange process is not difficult.
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A completely tax-deferred exchange must meet three criteria:
1. The replacement property must have a value equal to or greater than the sold property. (Net purchase price compared to net selling price)
2. The taxpayer must use all proceeds from the sold property to acquire the replacement property. If the replacement property has value less than the sold property, the taxpayer can keep the extra money, but may have to pay tax on the money kept.
3. If a mortgage is paid off from the sale of the sold property, then a mortgage of equal or greater value must be placed on the acquired property. If it is less, then this may be considered "debt relief", and the taxpayer may be taxed on the difference. The taxpayer may also offset the "debt relief" by contributing cash to the purchase of the acquired property in an amount equal to the "debt relief".
CAN'T I JUST DO THIS THROUGH MY ATTORNEY OR TAX PROFESSIONAL?
1031 exchanges need to be serviced through a specialized 1031 exchange bank account.
WHY EXHANGE ALLIANCE?
We offer over 100 years combined industry experience. As well, through our banking relationship, we offer multi-million dollar FDIC insurance for your funds.
WHAT DOES THE TAXPAYER NEED TO DO AFTER THE CLOSING OF THE SOLD PROPERTY?
The taxpayer must identify the property they wish to acquire by the 45th day after they close on the sold property. They must close on the purchase of the acquired property within 180 days of the closing of the sold property. These deadlines are essential to meet, and the proper paperwork must be completed timely. This is another reason an experienced 1031 exchange intermediary must be used.
HOW DOES THE TAXPAYER IDENTIFY THE PROPERTY (OR PROPERTIES)?
The taxpayer has three options to identify properties:
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1. Name three (3) properties and acquire any one of them, two of them, or all of them.
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2. Name as many properties as they like as long as their combined market value (purchase price) does not exceed 200% of the value (selling price) of what they sold. Purchase as many as they like.
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3. Name as many properties as they like, having as much value as they like, as long as they eventually purchase 95% of the value of what they have identified.
WHAT IS THE COST OF A 1031 EXCHANGE?
Exchange Alliance, LLC charges a fee at the closing of the sold property. This fee is one of your closing costs. No fee is charged at the closing(s) of the acquired property/properties.
DO I NEED TO CONSULT WITH MY TAX ACCOUNTANT?
Yes. While your tax accountant is not a qualified 1031 exchange intermediary, it is important for you to consult with them to determine if a 1031 exchange is beneficial for you.
HOW DO I START THE PROCESS?
Feel free to contact us