By Elizabeth Weintraub. Home Buying/Selling Expert
Elizabeth Weintraub has an extensive background in real estate spanning more than 30 years, including experience in related industries such as title and escrow. She is a full-time broker-associate at Lyon Real Estate's midtown Sacramento office and is recognized as a top producer. She is also a Life Member of the Master's Club, an honor bestowed by the Sacramento Board of REALTORS®, and ranks in the top 1% of all the agents at Lyon Real Estate.
CA BRE License #00697006
By C. Grant Conness, President, 1031 Alternatives Group
The delayed 1031 Exchange avoids those pre-1984 problems but stricter deadlines are now imposed. A taxpayer who wants to complete an exchange, lists and markets property in the usual manner. When a buyer steps forward and the purchase contract is executed, the seller enters into an exchange agreement with a Qualified Intermediary who, in turn, become the substitute seller.
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The exchange agreement usually calls for an assignment of the seller’s contract to the Intermediary. The closing takes place and, because the seller cannot touch the money, the Intermediary receives the proceeds due the seller.
1031 Exchanges Carry Time Restrictions
At that point, the first timing restriction, the 45-Day Rule for Identification, begins. The taxpayer must either close on or identify in writing a potential Replacement Property within 45 days from the closing and transfer of the original property.
The time period is not negotiable, includes weekends and holidays, and the IRS will not make exceptions. If you exceed the time limit, your entire exchange can be disqualified and taxes are sure to follow.
Types of Replacement Properties to Identify:
- Three properties without regard to their fair market value .
- If the three-property rule and the 200% rule is exceeded, the exchange will not fail if the taxpayer purchases 95% of the aggregate fair market value of all identified properties.
What is Boot?
Realistically, most investors follow the three-property rule so they can complete due diligence and select the one that works best for them that will close. Generally, the goal is to trade up to avoid the transfer of "boot" and keep the exchange tax-free.
"Boot" is the money or fair market value of any additional property received by the taxpayer through the exchange. Money includes all cash equivalents, debts,
liabilities to which the exchanged property is subject. This is "non-like-kind" property and the rules governing it during the exchange are complex. Suffice it to say, without expert advice, receiving "boot" can result in taxes.
1031 Exchanges are Subject to the 180-Day Rule
Once a replacement property is selected, the taxpayer has 180 days from the date the Relinquished Property was transferred to the buyer to close on the new Replacement Property. However, if the due date on the investor's tax return. with any extensions, for the tax year in which the Relinquished Property was sold is earlier than the 180-day period, then the exchange must be completed by that earlier date. Remember, a portion of this period has already been used during the Identification Period. There are no extensions and no exceptions to this rule, so it is advisable to schedule the closing prior to the deadline.
Since the law requires that the taxpayer not touch the proceeds from the first transaction, the Qualified Intermediary acquires the Replacement Property from the seller at closing and after the transaction is completed, then transfers it to the taxpayer.
1031 Exchanges Are Not For Do-It-Yourself Investors
This is a basic description of how a successful 1031 Exchange works. Depending upon the taxpayer’s situation, the type of property relinquished and the characteristics of the Replacement Property, other aspects of the Exchange may be involved. Its completion may become complex and experts should always be consulted. This is no task for a "do it yourself" investor.
Using the power of the 1031 Exchange to build and preserve wealth and assets, generate cash flow from investments. restructure, diversify and consolidate real estate holdings is the right of every owner of investment property in the United States. American taxpayers should never have to pay capital gains taxes on the sale of their investment property if they intend to reinvest those proceeds in more investment property. Securities offered through Pacific West Securities, Inc. Member FINRA/SIPC.
This material is neither an offer to sell nor the solicitation to purchase any security. The information is for discussion and information purposes only. It is not intended to replace competent legal, tax or financial planning advice. The applicable tax codes apply to and relate to federal law only. Individual states may have their own additional tax codes. Please contact the appropriate tax and legal professional in your state. This information is provided from sources believed to be reliable but should be used in conjunction with professional advice that is consistent with your personal situation.
At the time of writing, Elizabeth Weintraub, DRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.