1031 Frequently Asked Questions

How can I qualify to pay NO taxes when I sell my property?
Any investor can qualify! Section 1031 of the IRS code lets you sell your property and buy a new property without paying any taxes. You simply follow specific rules. A professional qualified intermediary can help you qualify and gain the advantages of a 1031 tax free exchange.

What is a qualified intermediary?
The IRS says if you touch the money, you pay the tax. However, if you use a qualified intermediary to transfer the money from the sold property into the purchased property, you qualify for a tax free exchange. The qualified intermediary provides a "safe harbor" for your funds. A qualified intermediary will consult, structure, guide and document the exchange transaction from beginning to end. The IRS does not permit your accountant, attorney, or escrow company to be your qualified intermediary. So your qualified intermediary will work with your attorney and CPA to ensure your tax fee exchange goes smoothly.

How do I choose a qualified intermediary?
To ensure the safety of your funds, you should contact your real estate professional, title and escrow company, attorney, or CPA for references to a reputable qualified intermediary.

Can I avoid paying taxes forever?
Yes, you can. By simply following the 1031 exchange rules every time you sell one or more properties and buy replacement properties, when you die your estate escapes all the capital gains taxes forever!

What exactly are the tax advantages in exchanging?
You can eliminate paying any capital gains taxes, and you can eliminate paying the even higher-rate taxes on the recapture of depreciation you've taken on your property. By exchanging into a higher priced property you'll also gain additional deprecation deductions which can increase your after-tax income.

Are there reasons to exchange other than tax advantages?
Yes, there are many non-tax reasons to exchange. For example, if you no longer like managing property, you can exchange your management intensive property for triple-net management free property, or exchange multiple smaller properties for one that can be professionally managed. Or, say your current property cannot be easily refinanced. You could exchange out of that property for a new property which could be refinanced more easily so you can take some cash out. Or, you might exchange to improve cash flow.

What kind of real estate qualifies for a 1031 exchange?
Almost every kind of real estate is considered "like kind" and can be exchanged for any other real estate, including vacant land for apartments, a rental house for a shopping center, an office building for a leasehold interest with 30 years or more remaining, as long as you hold them for investment or business use. Check with a qualified intermediary on the specific properties.

How long can I take to buy a new property?
You have 180 days between the closing date on the sold property and the closing date on the purchased property.

Can I buy a new property before selling my old one?
Yes, you can buy a new property before selling the old property and still qualify - it's called a "reverse" exchange. The qualified intermediary takes title to the new property you buy and holds it for you until you sell your old property.

Can I get money out of the exchange tax free?
Yes, one way is to complete the exchange first and then refinance the new property.

Can I refinance without blowing the tax free exchange?
Yes, you can refinance the property you are selling before you exchange, or refinance the property you are buying after you exchange, and the proceeds are tax-free. The timing and contract dates are critical though, so be sure to check with a qualified intermediary for the details.

Can I buy more than one piece of property tax free?
Yes, you can acquire any number of replacement properties.

Can I exchange several smaller properties for a larger one?
Yes, you can sell any number of smaller properties and trade up to a larger one.

How do I exchange into a larger property (trade up)?
You trade up by getting a bigger loan on the new property, or adding cash, or equities in other properties, or notes carried back from the sale of other properties, etc. Done right, it's all tax free.

Can I carry back a loan on the property I'm selling and still have a tax free exchange?
Yes, the payments you receive are taxed as you get them, on an installment sale basis. The balance of your equity is exchanged tax free.

I've already sold my property. Can I still do an exchange?
Yes, provided your sale has not closed yet. Contact a qualified intermediary to turn your taxable sale into a tax free exchange with some simple paperwork. You can open an exchange right up until the day before closing.

(In a nutshell) What is a TIC (Tenant-In-Common) Ownership?
TIC ownership provides real estate buyers with the advantages of ownership in a larger property, revenue and annual depreciation benefits without having to purchase the entire property by themselves.

Okay, so how do I get started?
Call a qualified intermediary, and discuss your 1031 exchange with a knowledgeable tax/legal advisor. The qualified intermediary cannot, by law, be your tax or legal advisor, but can work closely with and provide guidance to you and your advisors.

DISCLAIMER: This is not intended to be tax advice. You are advised to consult with your own tax/legal advisors, as your individual situation is unique. All information contained herein is from reliable sources but is not guaranteed to be applicable to your individual situation or accurate in your circumstances.