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1031 Exchange

Frequently Asked Questions

What is a 1031 exchange?

A 1031 exchange allows an investor to sell a property and reinvest the proceeds in another property without having to pay (i.e. deferring) both capital gains and depreciation recapture taxes on profits from the sale.  It is most often used for investments in real estate, but can be applied to other assets. Please see our eBook What is a 1031 Exchange for additional background.

Do I qualify for a 1031 exchange?

Generally, if your real estate is used for a business or held as an investment property it will qualify.

Can I do a 1031 exchange on my home?

No, you cannot use a 1031 exchange on your primary residence.

What kind of replacement property can I buy?

The simple answer is almost any type of investment real estate you want. The IRS generally considers all investment properties to be “like-kind”. For example, raw land can be exchanged for an office building, a strip mall can be exchanged for an industrial building or a rental home exchanged for one or more fractional 1031 properties.

What are the timeframes on completing my 1031 exchange?

There are two deadlines to know. First, your replacement property must be identified (not purchased) within 45 calendar days from the date you sell your property. Second, you must complete the purchase of your replacement property within 180 calendar days from date of the property you sell. These timeframes are set in stone, the IRS does not grant extensions.

How many replacement property candidates can I identify in the 45-day timeframe?

There are three different rules when identifying replacement properties. The rule you choose to follow doesn’t matter, as long as you choose one.

3-Property Rule: You can identify up to three potential replacement properties, as long as you purchase at least one of these within the 180-day timeframe. Most investors focus on acquiring one of the three, with the other two serving as back-up options. This is the most commonly used rule.

200% Rule: More than three properties may be identified as long as their combined value does not exceed 200% of the value of property you sold.

95% Rule: More than three properties may be identified as long as you acquire at least 95% of the total purchase price of these.

Are there any value requirements for my replacement property?

In order to defer all your capital gains taxes, the replacement property must have a purchase price and mortgage balance equal to or greater than the property you sold. See the Realized 1031 Calculator to check requirements on your potential exchange.

Do I have to put all profits into another property?

No, investors are not required to reinvest 100% of the money received from the sale of their property. However, the amount you choose not to reinvest is subject to capital gains and depreciation recapture taxes.

Does a foreign property qualify for a 1031 exchange?

To be eligible for a 1031 exchange, properties must be considered “like-kind”. Property located outside of the U.S. is not considered “like-kind” to property located within the U.S. However, property located outside the U.S. is considered “like-kind” to other property located outside of the U.S. For example, a U.S. investor could exchange a property in Canada for one in Mexico under a 1031 exchange, but could not exchange the Canadian property for one in the U.S. A law has passed that supports exchange of a domestic property with a property located in a U.S. territory. Investors considering exchanges involving properties located in foreign countries should consult a legal professional.

How much does a 1031 exchange cost?

The cost of a 1031 exchange varies according to the cost of the qualified intermediary. A qualified intermediary can generally cost anywhere from $300 to $3,000 or more, depending on demand and complexity of the exchange. It is important to note that when choosing a qualified intermediary, avoid evaluating based solely on price.

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    Realized1031.com is a website operated by Realized Technologies, LLC, a wholly owned subsidiary of Realized Holdings, Inc. (“Realized Holdings”). Securities and/or Investment Advisory Services may be offered through Registered Representatives or Investment Advisor Representatives of Realized Financial, Inc. ("Realized"), a broker/dealer, member FINRA/SIPC, and registered investment adviser. Realized is a subsidiary of Realized Holdings, Inc. ("Realized Holdings"). Check the background of this firm on FINRA's BrokerCheck.

    Hypothetical example(s) are for illustrative purposes only and are not intended to represent the past or future performance of any specific investment.

    Investing in alternative assets involves higher risks than traditional investments and is suitable only for sophisticated investors. Alternative investments are often sold by prospectus that discloses all risks, fees, and expenses. They are not tax efficient and an investor should consult with his/her tax advisor prior to investing. Alternative investments have higher fees than traditional investments and they may also be highly leveraged and engage in speculative investment techniques, which can magnify the potential for investment loss or gain and should not be deemed a complete investment program. The value of the investment may fall as well as rise and investors may get back less than they invested.

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