Feb 10, 2023
Peter Holc
Welcome to Castling Tax, your one-stop platform for all things related to 1031 exchanges. Whether you're a seasoned investor or just starting out, you might have questions about how 1031 exchanges work. We've compiled some of the most common questions and answers. Let's dive in.
1. What is a 1031 exchange?
A 1031 exchange, also known as a like-kind exchange, is a provision under the U.S. tax code which allows an investor to defer capital gains tax by selling a property and reinvesting the proceeds into a new, "like-kind" property.
2. Why is it called a “1031” exchange?
The name "1031" comes from Section 1031 of the U.S. Internal Revenue Code, which details the conditions under which the capital gains from swaps of certain types of properties won't be immediately taxable.
3. Who can benefit from a 1031 exchange?
Any real estate investor, whether individual, partnership, corporation, or LLC, who is looking to sell an investment property and purchase another can benefit from a 1031 exchange by deferring the capital gains tax.
4. What qualifies as "like-kind" property?
"Like-kind" refers to the nature or character of the property, not its grade or quality. This means that an apartment building can be exchanged for a ranch or a commercial building. However, U.S. properties must be exchanged for other U.S. properties.
5. Can I do a 1031 exchange with my primary residence?
No, the 1031 exchange applies only to properties held for productive use in a trade or business or for investment purposes.
6. What is a qualified intermediary?
A qualified intermediary (QI) facilitates the 1031 exchange by holding the sales proceeds from the relinquished property and then using those funds to acquire the replacement property. It’s essential to have a QI to ensure the process is executed correctly and complies with IRS regulations. Castling Tax is a qualified intermediary that can help guide your through every step of the process.
7. How long do I have to find a new property?
From the sale date of your relinquished property, you have 45 days to identify potential replacement properties. From the sale date, you have a total of 180 days to complete the purchase of the replacement property.
8. Can I receive any cash or other benefits from the exchange?
Receiving cash or other benefits not reinvested in the replacement property is termed as "boot," and is taxable. It's essential to reinvest all the proceeds from the relinquished property to fully defer capital gains tax. We've created the 1031 exchange calculator to show you what tax savings you could achieve.
9. What if I identify more than one property within the 45-day period?
You can identify more than one property. There are specific rules, but the most common ones are:
Three Property Rule: Identify up to three properties, regardless of their total value.
200% Rule: Identify any number of properties, but their combined fair market value should not exceed 200% of the relinquished property's value.
95% Rule: If you identify properties exceeding the 200% rule, you must acquire 95% of the aggregate value of all identified properties.
10. Can I do multiple 1031 exchanges?
Yes, you can chain multiple 1031 exchanges, deferring capital gains taxes until you eventually sell a property without doing another exchange.
Conclusion
1031 exchanges are a powerful tool for real estate investors, offering an excellent opportunity to defer taxes and grow wealth. You can learn more in our comprehensive article on 1031 exchanges. Whether you're considering your first exchange or need assistance with a complex transaction, Castling Tax is here to guide you. Visit our platform to facilitate your next 1031 exchange seamlessly.