FAQ on IRS Section 1031 Exchange

1031 Exchange

After selling, how long do I have to identify a replacement property in a 1031 Exchange?

You have 45 days from date of sale of current property to identify up to three potential replacement properties. (Four or more as long as the value doesn’t exceed double the amount of the property sold). If the value of the new properties is more than double, no less than 95% of said properties must be purchased.

How soon must I purchase a replacement property within a 1031 Exchange?

Seller has 180 days from closing on the first property or from extension on the Exchangor’s tax return, to purchase another property.

What happens if my replacement property in the 1031 Exchange is lower value?

The net market value and equity of the newly acquired property must exceed that of the sold property in order to defer 100% of the tax. If not, tax will be levied on the difference. Debt and equity in the relinquished property must be equal to or less than the debt and equity in the replacement property.

How long must I hold a property within a 1031 Exchange?

There are no specific hold times in the 1031 code, but the IRS will attempt to determine whether the property was acquired to fix and flip or was it intended to be held for productive use or investment? The shorter the time held, the more substantial the facts should be to support the investment or productive use intent of the Exchangor.

What are the biggest reasons to do a 1031 Exchange?

Allows the investor to re-invest the taxes that would normally be due on the sale of a property. This allows the investor to do larger deals and more of them while properties remain in the 1031 Exchange while deferring taxes.

What are the biggest disadvantages for doing a 1031 Exchange?

At some point in the future, the investor will conceivably have built up a substantial gain inside the exchange and will want to “cash in their chips” so to speak. It’s at that point, the tax man comes for his greatly appreciated share of taxes. Without a strategy to offset or eliminate taxes, the investor will see a lot of their profits disappear.

What if I can’t find a new property I’m happy with within 180 days?

If by preference or out of necessity, you do not purchase another property for your 1031 Exchange, the total earned profits from the culminating transaction will most likely be subject to taxation. Using good tax planning with the IRS Section 170 Bargain Sale for example, most or all taxes due may be mitigated.

How can I get out of a 1031 Exchange paying little or no taxes?

We don’t know enough about your tax liability to make that judgment, but what we can tell you is this… When you cash out of your 1031 Exchange, there is typically a big tax bill due. You can offset some or all of that tax liability with the IRS Section 170 Bargain Sale which in effect, absorbs the brunt of the tax liability with the charitable portion of the IRS Section 170 Bargain Sale.

You can accomplish this a couple ways…

  1. Sell the property coming out of the 1031 Exchange using the IRS Section 170 Bargain Sale. This assures that the bulk of the funds you ultimately receive will be tax free. It also greatly reduces taxes due on the cash portion of the transaction.
  2. If you have already been cashed out of your 1031 Exchange and are facing a big tax bill, you can do the IRS Section 170 Bargain Sale on a different piece of property and use those tax savings to offset some or all of your gains from the 1031 Exchange.

The amount of tax reduction is dependent on your tax liability, income and other factors. If you have a specific property in mind, give us a call and we’ll most likely be able to match it up with one of our buyers and get an offer back to you fairly quickly.

Disclaimer: Welfont is not a legal, financial, investment adviser or tax accounting firm and does not offer any legal, financial, or tax services or advice. Although the information contained herein is presented in good faith and believed to be correct, it is general in nature, so those considering transactions related to Internal Revenue Code 170 should consult their own tax counsel and/or tax professional or both.  Furthermore, the information contained herein may not be applicable or suitable to some parties.