A: 1031 Exchange is a method for selling a property and then buying another property within a fixed time- frame. The United States Internet Revenue code states that 1031 exchange of properties carried out for investment, business, or any other productive use accompanies no gain or loss, since the economic gain that could produce funds to pay any tax has not been achieved. This entire transaction is considered as an exchange or swap of one property for another.
Q2: What is the benefit of 1031 exchange?
A: While you get involved in a property transaction under 1031 exchange, you can defer the state and federal capital gain taxes related to the relinquished property. Once you delay the tax, you can get more money that you can invest in any other property.
Q3: Which property qualifies for 1031 exchanges?
A: The property exchanged under this law must be “like-kind”, which indicates that the property should be identical in nature or character, immaterial of property or grade. From a vehicle to a ball team trade, to an investment property, all qualify for 1031 exchange.
Q4: Which of the properties do not qualify for 1031 exchange?
A: Property that is held specifically for sale, such as bonds, stocks, inventories, securities, etc., do not qualify for the exchange.
Q5: What are different types of 1031 exchanges?
A: Five main types of exchanges under section 1031 include simultaneous exchange, delayed exchange, improvement exchange, personal property exchange, and reverse exchange.
Q6: What is a delayed exchange?
A: When the trader relinquishes a property on one date and then buys a replacement property on some other later date, a delayed exchange of properties takes place.
Q7: What are the different names of delayed exchange?
A: It is also widely known with various other names such as, “Starker Exchange”, “Deferred Exchange”, or “Like Kind Exchange”.
Q8: How 1031 exchange companies are helpful in a delayed exchange?
A: Considering the time consuming job of searching for the like-kind property in a delay exchange, the role of 1031 exchange firms becomes important. They take care of the cash for relinquished property, search for a befitting replacement property, and use the same cash for buying the replacement property.
Q9: What are the time limits involved for Delayed exchange?
A: The maximum permissible time for a property transaction to complete in a delayed exchange is the tax filing date, or 180 days of exchange period; whichever is earlier. However, it is essential for the exchanger to identify the potential replacement property within 45 days of closing the sale of relinquished property. This particular period is called as identification period and is included within the exchange period of 180 days.
Q10: What are the identifying requirements for replacement property under Delayed 1031 exchange?
A: In order to qualify for a 1031 exchange, the exchanger need to comply with any one of the three identification requirements, which include:
The Three (3) Property Rule
The 200% of Fair Market Value Rule
The 95% Exception Rule
Q11: What is the ‘The Three Property Rule’ for delayed exchange?
A: The rule allows the exchanger to identify at the most three like-kind replacement properties. It does not set any limitation on market value of replacement 1031 exchange properties.
Q12: What is ‘The 200% of Fair Market Value Rule’ for delayed 1031 exchange?
A: This rule allows the traders or the 1031 exchange companies (on the former’s behalf) to identify more than three potential like-kind replacement properties, on the condition that the total FMV of all the identified properties is less than 200% of the price at which the relinquished property was sold.
Q13: What is ‘The 95% Exception Rule’ for delayed 1031 exchange?
A: This rule comes into existence when the number of like-kind replacement properties identified exceeds both the Three property rule, as well as the 200% of FMV rule. It considers the property identification as valid for 1031 exchange if the exchange acquires a minimum of 95% of the fair market value of all the identified replacement properties.
Q14: How delayed 1031 exchanges of properties work?
A: Traders, opting for delayed exchange to defer their capital gain taxes on the relinquished property should abide by the following important steps with the help of 1031 exchange firms:
Purchase of property and sale contract
Submission of documents associated with the 1031 exchange of relinquished property
Closing of the relinquished property and conveying the information the buyer
The 1031 exchange company holds the proceeds of the sold property and informs the seller to identify potential replacement property in 45 days
The trader identifies the like-kind replacement property
The 1031 exchange firm prepares the documents concerning 1031 exchange requirements
Closing of the replacement property within 180 days of exchange period
At Triple Net Investment Group we can assist you in locating a like-kind property for a 1031 exchange and ensure a smooth and successful transaction.
