Commonly asked questions
Q. Can I use my vacation home in a 1031 exchange?
A. No, only real property held for business or investment purposes (not personal use) can be used in a 1031 exchange.
Q. What if I live on part of the property?
A. The taxpayer can split the transaction between IRC Section 1031 and the personal residence exclusion under IRC Section 121.
Q. Can I sell or buy multiple properties in a 1031 exchange?
A. Yes, you can exchange multiple smaller properties for a larger one and vice versa.
Q. How many potential replacement properties may I identify?
A.
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3-Property Rule: You may identify up to 3 properties without regard to their value
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200% Rule: You may identify more than 3 properties provided that their combined fair market value does not exceed 200% of the value of the relinquished property.
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95% Rule: You may identify any number of properties, provided that you acquire 95% of those properties
Q. Do I have to obtain a mortgage on my replacement property in the same amount or same percentage of debt as I had on my relinquished property?
A. No. Just follow the above rules
Q. Does seller financing jeopardize my exchange?
A. Seller Financing is considered boot, which means it is taxable in the year(s) that it is paid (considered an "installment sale"). There is a possibility that the Seller Financing (Note) can be placed into the exchange without paying taxes, but the entire cost of the purchase of the replacement property would have to be funded by the Exchanger during the 180 day replacement period.
Q. How can I defer the maximum amount of Capital gains tax in a 1031 exchange?
A. The replacement property being purchased must be equal or greater in value than the property being sold. The entire net proceeds from the sale must be used to purchase the replacement property.
Q. What if I don't use all the net proceeds on the purchase?
A. You will be taxed on the difference.
Q. Can I purchase replacement property before I sell the property I own?
A. Yes. This is referred to as a Reverse Exchange. It has greater complexity and fees and must be initiated BEFORE purchasing replacement property. The property is held by an Exchange Accommodation Taxpayer. Like Kind Exchange or one of our professional partners can serve as an Exchange Accommodation Taxpayer. Please contact our office for more information.
Q. Can I purchase replacement property that is not yet built?
A. Yes, provided that the improvements on the property are completed prior to expiration of the 180 days. This is considered a Construction Exchange and has greater complexity and fees. Here again, the property is held by an Exchange Accommodation Taxpayer. Like Kind Exchange or one of our professional partners can serve as an Exchange Accommodation Taxpayer. Please contact our office for more information.
Q. Can a corporation, partnership or limited liability company be involved in a 1031 exchange?
A. Yes, provided the entity selling the relinquished property is the same as the entity purchasing the replacement property. Limited Liability Companies or Trusts that are 100% owned by the same individual or entity are considered "Disregarded Entities", and are therefore the same as the individual owner or entity for 1031 purposes.