A properly structured 1031 ‘Like-Kind’ Exchange allows an investor to sell a property, to reinvest the proceeds in a new property and to defer all capital gains.
IRS Section 1031 (a)(1) states:
“No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment, if such property is exchanged solely for property of like-kind which is to be held either for productive use in a trade or business or for investment.“
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Types of 1031 Exchanges
Delayed / Forward Exchange (most common)
The relinquished property is first sold and then the exchanger has 180 days to acquire the replacement property (45 days to Identify).
Simultaneous Exchange
The relinquished property is sold and the replacement property is acquired on the same day (concurrently).
Reverse Exchange
The replacement property is acquired prior to selling the relinquished property. This is a complicated process – contact us to discuss your options.
Improvement Exchange
This structure allows you to use exchange proceeds from the sale of the relinquished property to acquire the replacement property and proceeds of the sale to make improvements to the replacement property (build on the land or improve the existing property). Improvement Exchanges can be combined or used together with either a Reverse or Delayed/Forward Exchange structure.
1031 BASICS
What Type of Property Qualifies for a Like-Kind Exchange?
Both the relinquished property you sell and the replacement property you buy must meet certain requirements. Both properties must be held for use in a trade or business or for investment.
Like-Kind-Property
Properties are of like-kind if they’re of the same nature or character, even if they differ in grade or quality.
Real properties generally are of like-kind, regardless of whether they’re improved or unimproved. However, real property in the United States is not like-kind to real property outside the United States
Examples of Like-Kind Properties
- Single Family Residential (Rental/Investment)
- Multifamily Residential (2-4 Units)
- Multifamily Commercial (5+ Units)
- Vacant Land, Raw Land, Undeveloped Land, Farmland
- Retail Buildings, Shopping Centers, Neighborhood Centers, Single and Multi-Tenant Net Leased
- Office Buildings
- Mixed-use Properties
- Industrial, Flex and Warehouses
- Fractional Ownership: Tenant-In-Common (TIC), Delaware Statutory Trust (DST)
Time Limits & Identification
Timing
Identification Period (45 days)
Exchange Period (180 days)
Identification:
3-Property Rule:
The Exchanger can identify a maximum of three (3) like-kind properties without regard for the total aggregate value of the properties identified.
200%-Rule:
The Exchanger can identify as many like-kind properties as they wish as long as the total aggregate value of all of the properties identified does not exceed 200% of the sale price of the relinquished property.
95%-Rule Exception:
If the Exchanger identifies more than three (3) properties and exceeds the 200% limitation, the Exchanger must purchase 95% of the aggregate value of the identified properties.
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LEGAL
Notice
Under the Tax Cuts and Jobs Act, Section 1031 now applies only to exchanges of real property and not to exchanges of personal or intangible property. An exchange of real property held primarily for sale still does not qualify as a like-kind exchange. A transition rule in the new law provides that Section 1031 applies to a qualifying exchange of personal or intangible property if the taxpayer disposed of the exchanged property on or before December 31, 2017, or received replacement property on or before that date.
Thus, effective January 1, 2018, exchanges of machinery, equipment, vehicles, artwork, collectibles, patents and other intellectual property and intangible business assets generally do not qualify for non-recognition of gain or loss as like-kind exchanges. However, certain exchanges of mutual ditch, reservoir or irrigation stock are still eligible for non-recognition of gain or loss as like-kind exchanges.
To report a like-kind exchange, taxpayers must file Form 8824, Like-Kind Exchanges, with their tax return for the year the taxpayer transfers property as part of a like-kind exchange. This form helps a taxpayer figure the amount of gain deferred as a result of the like-kind exchange, as well as the basis of the like-kind property received, if cash or property that isn’t of like kind is involved in the exchange. Form 8824 helps compute the amount of gain the taxpayer must report.
For more information about this and other tax reform changes, visit irs.gov/taxreform
1031 Exchanges now limited to real property, visit: www.irs.gov/newsroom/like-kind-exchanges-now-limited-to-real-property
1031 Exchange fact sheet, visit: www.irs.gov/pub/irs-news/fs-08-18.pdf
1031 Exchange like-kind tax tips, visit: www.irs.gov/businesses/small-businesses-self-employed/like-kind-exchanges-real-estate-tax-tips
Reporting like-kind exchange, CA FTB, visit: www.ftb.ca.gov/file/personal/reporting-like-kind-exchanges.html – www.ftb.ca.gov/forms/2018/18_3840.pdf
LEGAL
Disclaimer
AMERICAN PROPERTY EXCHANGE SERVICES, LLC – (APX 1031) is a qualified intermediary that specializes in facilitating 1031 exchanges. APX 1031 is not a real estate broker nor a law-firm and does not provide real estate tax, legal or accounting advice. You should consult your own real estate broker, tax, legal and accounting advisor (s) before engaging in any transaction.
The actual deadline for completing an exchange is the earlier of either 180 days from the date on which the Exchanger transfers the relinquished property, or the due date, including extensions filed by the Exchanger, for the Exchanger’s tax return for the year of the transfer of the relinquished property. Consult your tax advisor regarding your tax filing requirement dates.
Washington state law, rcw 19.310.040, requires an exchange facilitator to either maintain a fidelity bond in an amount of not less than one million dollars that protects clients against losses caused by criminal acts of the exchange facilitator, or to hold all client funds in a qualified escrow account or qualified trust that requires your consent for withdrawals. All exchange funds must be deposited in a separately identified account using your tax identification number. You must receive written notification of how your exchange funds have been deposited. Your exchange facilitator is required to provide you with written directions of how to independently verify of the deposit of your exchange funds. Exchange facilitation services are not regulated by any agency of the state of washington or of the united states government. It is your responsibility to determine that your exchange funds will be held in a safe manner.