FAQs about 1031s | 1031 Real Estate Exchange Specialist (2024)

FAQs

What is the 2 year rule for 1031 exchanges? ›

Section 1031(f) provides that if a Taxpayer exchanges with a related party then the party who acquired the property in the exchange must hold it for 2 years or the exchange will be disallowed.

Both properties must be held for use in a trade or business or for investment. Property used primarily for personal use, like a primary residence or a second home or vacation home, does not qualify for like-kind exchange treatment.

Property that does not qualify includes but is not limited to a primary residence, a second home, flip properties, or a property held in inventory for sale. Recent changes to tax law disallow personal property (artwork, boats, etc.) as valid property in a 1031 Exchange at the federal level.

Yes. But the family member cannot sell the property for two years; otherwise their transaction will trigger the tax you have deferred.

If a property has been acquired through a 1031 Exchange and is later converted into a primary residence, it is necessary to hold the property for no less than five years or the sale will be fully taxable.

A 1031 Exchange allows a taxpayer to defer 100% of their capital gain tax liability. To do this, the exchanger must buy new Replacement Property equal to or greater than in value to the property sold and reinvest all the proceeds from the sale of their old property.

The time limits associated with a 1031 exchange are critical, with a 45-day identification period and a total exchange period of 180 days. Compliance with these timelines is essential for a successful exchange and the deferral of capital gains taxes.

If a seller cannot meet the deadlines for the 45-day identification period or the 180-day exchange period, the 1031 exchange is considered a failure.

When you sell your investment property, you have 45 days to select up to three candidates for replacement properties. You have to have the intent to purchase one of them, and if you fail to purchase any of these three, your 1031 exchange is invalid. You also have to notify your intermediary during this window.

What happens if I don t identify a property in a 1031 exchange? ›

If you lose track of the deadline and do not identify or close on a property in time, you will lose the tax-deferred benefits as the transaction will become a taxable sale.

If you do not identify or acquire the replacement property within the 45 days, you are not able to complete a valid exchange. In addition to making sure you identify replacement property within 45 days, you must identify it unambiguously. That generally means using a legal description or street address.

The Bottom Line

While engaging in a 1031 exchange with a family member is possible, it should be approached with caution. If you decide to move forward, do so with the understanding that the IRS will likely examine the transaction to confirm that all the rules and guidelines have been followed.

The definition of related parties is a combination of related parties as defined pursuant to Sections 267(b) and 707(b) of the Internal Revenue Code. Related parties include, but are not limited to, immediate family members, such as brothers, sisters, spouses, ancestors and lineal descendents.

The answer is yes, you can buy multiple properties as part of a single 1031 exchange. Understanding how this works can open up new opportunities for your investment strategy. Let's explore this with insights from WealthBuilder 1031. 1031 exchanges are not limited to a one-for-one property swap.

When a property has been acquired through a 1031 Exchange and later converted to a primary residence, the owner faces a mandatory five-year hold period before having the ability to sell obtaining the Section 121 exclusion. The taxpayor still must satisfy the minimum two of five-year occupancy as primary residence.

You can continue to replace one property with another time and time again. You can even make a 1031 exchange where you buy into multiple properties. Once you sell your property and decide not to reinvest the money into another property however, you will have to pay capital gains taxes on the proceeds of the sale.

The 1031 exchange rules indicate that your targeted replacement property (or properties) must be of greater or equal value to your relinquished property (or properties). This is fairly straightforward if you're exchanging one asset into multiple assets, based on the Three-Property Rule, 200% Rule, and 95% Rule.

The 180-Day Rule

Full completion means that the title has been passed to the new owner. Since this would require payment for the property, it also means that funds may not remain in the exchange account after the 180^th day.