1031 Exchange Rules FAQs

This page includes some of our most frenquently asked questions about 1031 Tax Exchange Rules. We hope you find it very helpful. If you have any 1031 Tax Exchange questions, go to our ask a question page.


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  1. 1031 and Subdividing

    Dear Steve,
    I'm selling a condo in D___ Jan 15 and I want to buy 3 subdivision lots in C___ to hold for two or three years and then sell them and turn them over to more subdivision lots to hold another two or three years. Is this the right situation to use the 1031 process or will I get caught up in paying the deferred capital gains when I sell the subdivision lots?

    Dear B: 
    Subdividing real property is not an investment activity it is a business activity. However, If you buy lots that are already subdivided, hold them for investment and then resell them, that is an investment activity. In order to qualify for a 1031x both old and new properties must be held for investment. Therefore, the example which you propose seems to qualify for 1031x treatment. I hope you will chose us for your 1031x.

    Sincerely,
    Steven W. Hickox
    Attorney, President

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  3. 1031 Exchange and Carried Over Basis

    Question from a client

    Dear 1031x,
    In regards to an already successful deferred exchange, if the relinquished property has been fully depreciated doesn't this mean that the basis has been driven-down to zero? Since the basis of the old property is transferred to the new property, is there any form of depreciation for the new property? Also, is there any depreciation recapture?

    Dear S,
    1) If the relinquished property has a zero basis when sold then the replacement property will only have a basis equal to the amount that the replacement property exceeds the relinquished property in value. For example is you sell a zero basis property for $200K and 1031x into a replacement property with a value of $250K then the basis for the replacement property will be $50K.
    2) If you do a valid 1031x then there is no recapture of depreciation. The recaptured depreciation tax liability is also deferred. Let me know if you need more.

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  5. 1031 Exchange Condo Conversion

    Question from a client

    Dear 1031x,
    My clients owned a building with 7 stories (6 residential units and 1 ground retail unit) He plans to condominiumize the building and sold the top 6 residential units and kept the ground floor unit. Can this be structured as a 1031X? Thanks

    Dear Mr. F,
    This question is more complicated than you might think. 1) When property is subdivided it is usually treated as inventory held for resale and taxed at ordinary income rates. That income is taxed higher than capital gain rates and is not available for 1031x treatment. 2) If the property has been held for a period of time for investment then the gain, up to present, is capital gain and 1031x eligible. 3) It is only the increase in value due to subdivision and condo conversion that would be ordinary income. 4) The question is: How can we "trap" the gain up to this point as use 1031 to defer this while reporting the subsequent gain as ordinary income? 5) What we recommend to customers is an immediate sale of the property to a condo conversion and marketing entity. This sale would be a 1031x. Then the new entity, with a new tax basis, does the conversion and sells the units with ordinary income treatment on the profit. Sincerely,
    Steve Hickox
    Attorney / President

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  7. 1031 Exchange Convert Principal Residence

    Question from a client

    If a property was initially bought as an investment using a 1031 exchange method, and now will become an owner occupied residence due to a divorce, how does this affect the deferred tax status, both now and if the same property is sold for another owner occupied residence?

    You have 1031 exchanged into a property, and now, due to a divorce, have converted the use of the property from investment use to principal residence use. Your tax treatment going forward is as follows: After you have lived in the property for two years most of the gain realized upon sale will be tax exempt under IRC section 121. Under this code section you must have owned and lived in the home for two out of the last five years in order to qualify for tax exemption. Once you qualify for this exemption only one piece of the realized gain will NOT be tax exempt. During the time that this property (or the preceding property which was part of your 1031 exchange) was held for investment, you probably took a depreciation allowance. Any depreciation taken between May 1995 and the date it was converted to principal residence (the date depreciation allowance stops) will be recognized (taxed) upon sale of the property even if the rest of the gain qualifies for tax exemption under IRC section 121.

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  9. 1031 Exchange Estate Planning

    Security of our clients exchange funds is a question that our prospective clients often ask. Several of the defalcations by 1031 exchange companies occurred here in Colorado, including some by our close competitors and people that we knew. It really gave the business a black eye. Since then Colorado has passed probably the strictest laws regulating 1031 exchanges, they require a new bank account for each exchange so no co-mingling of funds is possible. Also the account is set up in a way that you sign to open the account and you also sign for ANY withdrawals. Our bank is very vigilant about checking withdrawal signatures against signatures used to create accounts. So you must authorize any withdrawal from your new 1031x account.

    Besides that, we have been in business since 1994 and have protected our client’s money through the years. We have handled over $1 billion dollars in exchanges without any loss of funds. You can trust us. Doing business with a Colorado based 1031 exchange company is now the prudent choice based on our state mandated controls

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  11. 1031 Exchange Multi-state; State Income Tax

    Question from a client

    Dear 1031x,
    If I am resident of State of Oregon and have business property there; then, do a 1031 exchange for property in Hawaii, and move/become a resident of the State of Hawaii, what happens if/when I sell the Hawaii property in a fully taxable transaction with respect to Hawaii Income tax? Will my basis for Hawaii Income tax be the reduced/tax-deferred basis and will I be subject to Hawaii income tax on the same amount that is taxed for federal income tax purposes? Where can I find more info on this 'cross-border' state tax when liquidating a 1031 exchange property?

    Dear R,
    When you defer Federal income tax through IRC Section 1031 almost all States allow deferral of State income tax as well. In your example you would first defer your Oregon State income tax. When you then sold your Hawaii replacement property, Federal and Hawaii State income tax would be due, but nothing would be due to Oregon. Your tax basis for both Federal and State taxes is the same.
    Sincerely,
    Steve Hickox
    Attorney/President

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  13. 1031 Exchange of Inherited Property

    Question from a client

    Dear 1031x,
    I am part owner of a house that I inherited from my father. I have never legally resided in the house myself. Probate Court gave me a share of the house in the mid 80's when my father passed away. After the Probate Court made me a co-owner of the property, I signed over my share to my aunt in a life-estate agreement, so she could remain in the house for the rest of her life. My aunt was placed in an elder-care facility in late 2004, and the life-estate agreement was terminated on that day. So I then again had control of my share of the property. Now the house is finally for sale with a broker.

    My plan has always been to take the proceeds from the house when it sells and buy a small home for myself in the midwest. Now I learned I may be subject to a capital gains tax because I never actually resided in the house myself. Is there a way the 1031 or any other section of the capital gains law takes into account a house that was passed down from family members as part of a parent's estate? Or will I need to buy out the entire house and move into it for two years to qualify for exemption from capital gains taxes?

    Dear W,
    Your inherited property is 1031 exchange eligible because you have held it for investment. However, the property that you propose to buy is not 1031 exchange eligible because you plan to live in it. For a 1031 exchange to work both old and new properties must be held for investment. Yes, you could move into the inherited home and live there for two years making that property 121 eligible. Sorry there is not a perfect solution for you
    Sincerely,
    Steven W. Hickox, Attorney & President

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  15. 1031 Exchange Related Party and Ownership Structure

    Question from a client

    Dear 1031x,
    I want to sell my office building and buy out my father who is 1/4 partner in LLC that owns and leases donut shop. My 2 brothers and I are the other 1/4 partners. Could this be done as 1031 exchange? Thank you.

    Dear D,
    There are several problems with what you are proposing:
    1) You cannot sell real estate and buy an interest in a partnership (LLC). That's not a like kind exchange.
    2) You cannot buy from a relative in a 1031x unless:
    a) He is doing a 1031x when he sells to you, or
    b) the gain that he is recognizing is larger than the one you are deferring. If you really want to do this is a tax deferred manner you could:
    1) Restructure the ownership of the donut shop such that the four of you own it as tenants in common.
    2) Swap you office building for your father's tenant in common interest in the donut shop. That would be a real estate for real estate 1031 exchange.
    3) Have your father hold the office building for two years. This is a requirement of a related party swap in a 1031x. Then your father could sell the office building and your 1031x would not be questioned. I know this is more complicated than you wanted to hear, but you asked.

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  17. 1031 Exchange With No Income From Property

    Question from a client

    Dear 1031x.com,
    I bought a lot in a seaside resort community in 1993 for investment. Built a house on the land in 1998 with a partner. The house has never been rented or occupied except for quarterly maintenance (2-3 days each visit). Did not want to rent the house due to bad rental experience with other property. We are talking about selling it now that home prices have substantially
    increased which was our original intent. I have some documentation (utility bills, gasoline purchases – the house is located 6 hours from principal residence) to substantiate the few days that the house has actually been
    used. Can we do a 1031 exchange of this home?

    Dear D,
    There is no requirement that you earn any income on your investment property. Many investment properties are held exclusively for future appreciation and not for current income. Everything that you state indicates that your intention from the beginning was to hold this for investment. I can confidently state that assuming all statements to be true, your transaction is 1031 eligible. I hope you will chose our company for this service
    Sincerely,
    Steven W. Hickox, Attorney & President
    www.1031x.com
    1-888-899-1031

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  19. 1031 Exchange, Refinance, Second Transaction

    Question from a client

    Dear 1031x,
    If I sell a property and buy another one with a 1031, spend all the cash, and take the same amount of loan, no taxes are to be paid, this is correct I suppose.
    However, in order to be a successful 1031, the new property should be investment property, and to be kept at least a year and one day.
    Am I still correct ?

    1. What if I sell this newly bought property, after one year and one day, for the same amount of money that I bought it for, and not re-invest ?

    2. If I sell it for more than I bought it for, and wish not to re-invest, on what part do I need to pay taxes, if I keep it for more than one year and a day ?

    Thanks for your advice.

    Dear Mr. B: Let me give you a simple example to explain: 1) You buy for $100K and one year later sell for $120K. Your gain is $20k. Tax will be paid on this $20K unless you 1031x (1031 exchange). You do a 1031x and buy a new property for $120K. Soon thereafter, for an independent business reason, you take out a new mortgage for $100K. This will be non-taxable borrowed money; not income. You wait another year and sell for $130K. You do not do a 1031x this time. You will be taxed on all the gain. That is the $20K you made in the first transaction and the $10K you made in the second transaction. 1031 is a deferral method only. I hope this helps.


    Sincerely,
    Steven W. Hickox, Attorney & President
    www.1031x.com
    1-888-899-1031

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  21. Can an entity do an exchange? (Corporation, partnership, LLC, trust)

    Yes. Title to the replacement property must track with the relinquished property. A partnership interest in one partnership may not be exchanged for a partnership interest in another partnership. A share of stock in one company may not be exchanged for a share of stock in another company. However, legal entities may perform exchanges under 1031.

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  23. Can I receive title to replacement property before giving up title to relinquished property?

    Reverse 1031 exchanges are permitted. However, the exchanger may not hold title to both properties at the same time. Instead an Exchange Accommodation Titleholder must hold title to one of the properties. Contact us for more detail.

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  25. Can I use exchange funds to build improvements on replacement property?

    Generally speaking the best way to accomplish this goal is to have a "Special Purpose Entity" acquire title to the replacement property, have the Special Purpose Entity build the improvements, and have the exchanger acquire the replacement property from the Special Purpose Entity under the regulations for exchanges. Please contact us if you are asked to perform a construction exchange.

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  27. Can I use exchange funds to do fix up on replacement property?

    It is generally best to have the owner of the replacement property perform the fixup prior to acquisition of the replacement property. As a second alternative, it is better to use funds other than exchange funds to perform the fixup on the replacement property. Finally, exchange funds can be used to perform fixup on the replacement property if the fixup is accomplished prior to the exchanger actually acquiring title.

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  29. Can I use exchange funds to pay down mortgage on property I already own?

    No. This is not considered a like kind exchange by the IRS.

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  31. Converting investment property to primary residence

    Question from a client

    Dear 1031x,
    My wife and I completed a residential rental property 1031 exchange in December 2003. We rented it soon thereafter, in February 2004 and it has primaryly been rented now for 22 months. We want to move into the house and make it our primary residence. How long do we need to wait to do this so as to avoid capital gains taxes on the original property sale? How soon after taking residency can we sell the house and be subject only to capital gains taxes on it as our personal residence? Thank you for your consideration.

    Dear James,
    Thank you for contacting us. Under 1031 both properties must be held for investment. Investment intent is determined at the time of purchase of the replacement property. After you purchase for investment, if an unforeseen change in circumstances occurs in your life then you can convert your investment property to your principal residence. There in no specific time frame specified. Longer is better. After conversion you must own the property for five years and live in it for two of the last five years in order to qualify for tax exemption under code section 121. If you move into your replacement property now, then your five year period would run through December 2008.

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  33. Dealer or Investor

    Question from a client

    Dear 1031,
    O.K, so options may be exchanged in a tax free exchange. And yet, most options are fairly short term i.e. an investor contacts to buy and then assigns his contract ("option") to a more long term investor or maybe owner occupant. Doesn't the IRS frown on so-called "dealers" using 1031 exchanges? Personally, I think investors are investors regardless of how long they hold the interest in a property but I heard the IRS doesn't see it that way. Your take on this?

    Dear M,
    Yes, the IRS makes a distinction between dealer and investor. Any property bought with the intent of short term resale will be considered dealer property (inventory) which will be subject to ordinary income tax and will NOT be 1031x eligible. Of course sometimes an investor buys a property, with the intent of holding it, and then the market place moves in his favor and he sells it in a very short period of time. It is really a question of intent.

    Intent, in turn, will be determined by all the facts and circumstances in the transaction. Some facts indicating dealer status are:
    1) Holding a real estate license;
    2) Frequency and history of similar transactions;
    3) Marketing activities related to the property;
    4) Accounting and tax treatment of the property while it is held. Remember, you can be both a dealer and an investor. If you are you should conduct the two activities under different business entities and keep the businesses separate. The IRS is well aware of the very different tax treatment of the two activities. I hope we can help with your investor and 1031x needs.

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  35. Depreciation Schedules

    Depreciation of your property is a complex topic, but residential improvements are depreciated over 27.5 years, while a commercial building is depreciated over 30 years. For a simple example, say you buy a commercial warehouse for $300,000. If you value the land at $50,000, then you would divide $250,000 by 30 (land does not depreciate). This allows you to take $8333.33 in depreciation each year. That can really help! Please note, depreciation is MANDATORY!! When you sell the building, all the depreciation you've ever taken on the building will be "recaptured" and taxed at 25%!! This "extra layer" of tax is often unexpected and makes an exchange even more valuable! Try out some scenarios on our tax calculator.

      Try Our Tax Calculator
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  37. Do I receive a cost basis in my replacement property?

    No. Tax basis from the relinquished property is carried forward into the replacement property. Tax basis in the replacement property is increased by any additional cash or increase in mortgage by the exchanger. Once a depreciation allowance is taken on the relinquished property it may not be used a second time on the replacement property. This rule is generally regarded as a negative consequence of a 1031 exchange. It is frequently misunderstood by both investors and brokers.

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  39. Down payment and loan reduction

    Any cash received by the exchanger whether at the sale of the relinquished property or at the purchase of the replacement property will be deemed "cash boot" and tax will be recognized to the extent of gain. This rule applies regardless of the exchangers cash position in the relinquished property. Regardless of the size of the exchangers down payment, principal pay down, or capital improvements on the relinquished property, the exchanger will be treated as having received "cash boot" if cash is received as part of the exchange.

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  41. Dual Use (Investment and principal residence)

    Questions from a client

    My brother and I inherited (via Living Trust) property in CA. Since the estate tax return was filed the property has appreciated $1.2M. We are considering a sale within the next year or so and seek information about 1031 exchanges. Specifically,

    1. If one TIC (tenant in common) currently lives in the inherited property (principle residence of my deceased parents) but the other does not, does it qualify for 1031? If not, how long does the property have to be unoccupied or leased to qualify? 

    2. Does a 1031 exchange defer both federal and state (CA) capital gains taxes? If state taxes are also deferred, does one have to exchange within the same state?

    3. If one TIC lives in VA and the other in CA, upon sale which state is due the capital gains tax?

    Thank you in advance for the initial consultation.

    Dear T,
    Thank you for contacting. Your relinquished property can qualify for both tax exemption under IRC section 121 as to the owner using it a principal residence and for tax deferral as to the owner who is holding it for investment. It would be nice if the owner occupant paid the own not occupying some rent just to cement the investment intent of that owner. Yes 1031x defers both state and federal income in most instances (including CA). If you sell in CA it does not matter where you buy as long as it is in the US. As for as which state tax will apply is you do not do an exchange, generally you pay tax where you live. The state where the property is located CA has very high income tax (about 9%). If you live in VA, you will pay VA about 5% and then pay CA about 4%. What I am saying is that CA wants to get paid to but they will give you credit for the taxes you first pay in VA. I hope this is clear. If you need more let me know.

    Sincerely,
    Steve Hickox
    Attorney / President

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  43. Can we exchange the proceeds from the sell of the rental property into Deeds of Trust?

    Dear 1031,
    We are considering selling a condominium that we have used as a rental property for ten years. We have never lived in it. It is paid for free and clear. If we decide to sell, we will pay LOTS of taxes - capital gains plus alternative minimum tax. Of course, we would like to avoid that. A different investment: In the past, we have invested in first and second Deeds of Trust. This was set up to pay us interest only for 12 to 24 months with a balloon payment at the end for the principal.
    Question: Can we exchange the proceeds from the sell of the rental property into Deeds of Trust?
    Thank you for your time.

    Dear R,
    Thank you for contacting us. I too like direct lending as an investment alternative to real estate. Unfortunately the IRS does not consider the sale of real estate and the use of the funds to make new loans to be a "like kind" exchange. You must buy real estate. Because you have a lot of equity in your condo you might consider refinancing the property and taking cash out which you use to make loans. Then sell the condo with the new mortgage on it being paid off. Then 1031 exchange into a new property. This is a way of freeing up some of your equity. Contact me further if this sounds interesting to you.
    Sincerely,
    Chris Sayre VP

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  45. Exchange involving Gifted property

    Question from a client

    My mother gifted me her primary residence in 2001 with no exchange of any money. I have never lived in the house during this time; my mother has. She moved out 7 months ago. We are selling the house and there is not much to claim for capital improvements. The house was purchased in 1963 for 25K. It was worth about 485k when she gifted it to me and it is selling for 705K. Can you help? Thanks

    Dear M: Your question is more complicated than you think.

    1. Your basis (starting point for calculating gain) is a carried forward basis from your mother. This is because she gifted it to you. Her basis and therefore your basis is $25K.
    2. If you have held the property for investment since you received it as a gift in 2001, then you can sell it and 1031 exchange it into new investment property, and defer the tax liability.
    3. The big question is: Have you held it for investment? The reason I ask that is that I presume that you allowed your Mother to live there for little or no rent. That doesn't make it look like an investment.
    4. You should take the position that you held the property for investment and then gifted to your Mother the value of the rent that anyone else would have paid to live in the house.
    5. Because you have never lived in the house IRC section 121 does not apply.
    6. If you do not do a 1031 exchange then you will be liable for tax on the full gain ($705K-$25k= $680K) An estimate of the tax on the amount, state plus US is $136K. This is a lot of tax and you should certainly consider a 1031 exchange.

    I hope we can be of help.

    Sincerely,
    Steve Hickox
    Attorney / President

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  47. Fix up property

    Often a relinquished property will require certain repair prior to sale or as a condition of sale. If the repairs are done prior to sale of the relinquished property and are paid directly to the person performing the repairs and deducted from the net proceeds then these amounts should be treated in the same fashion as mortgage. However, if the exchanger pays for the repairs prior to closing and then seeks reimbursement of these expenses he will be treated as having received "cash boot." This is another example of how our companys involvement in the structuring of the sale of the relinquished property can be beneficial to the exchanger if we are involved early enough in the transaction.
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  49. How long does one need to remain in title on an exchanged property in order to enjoy the lowest, and/or long term, capital gains tax rate in the resale of an exchanged property?

    Question from a client

    Dear Steve,
    How long does one need to remain in title on an exchanged property in order to enjoy the lowest, and/or long term, capital gains tax rate in the resale of an exchanged property?

    Dear B,
    When you 1031x from one property into another your old basis gets carried forward into the new property with adjustments. Your holding period also gets carried forward. Therefore you look at the combines holding periods of both old and new properties. If the combined holding period is longer than one year then you qualify for long term capital gains treatment. REMEMBER holding period does not effect the higher tax rate imposed on recaptured depreciation. Do not make the mistake of underestimating your tax liability because you have a combined holding period of over one year. Sincerely,

    Dear Steve,
    Thanks for your quick reply to my "holding period" vs. "capital gain" tax liability question. I have another question which should have been included with the initial one. A 1031 exchange which was transacted last November thru your office resulted in the acquisition of a commercial property which is now titled in equal shares (50/50) as "Tenants in Common". The other "tenant" also transacted a 1031 thru your office and used his equity in our mutual purchase. We would like to establish an LLC to obtain some additional "protection" since the property has an excessive amount of "exposure". I remember something from your website about being "careful" in doing this and you suggested "additional insurance" to cover potential liability issues. Since my partner (AKA other "tenant in common") is younger and just starting out, I feel that perhaps I should have additional protection. Therefore, I have reread the Client Tools article pertaining to "How to Hold Title to Investment Real Estate" and feel it best that I establish a "single member" LLC. Your opinion of my assessment of the situation would be most appreciated as would be help in establishing the "single member" LLC. I am domiciled in, and a resident of, Arizona.

    Dear B: Yes I recommend that each of you establish a single member LLC and then hold title to the property as tenants in common. Forming a single member LLC requires simple registration with the AZ secretary of state. Because there is only one member no operating agreement is needed. Moreover, since it is an entity disregarded for tax purposes no tax id number is required. Simply use your SS#. Finally, you might want an agreement between tenants in common to spell out respective duties related to the property. Sincerely,
    Steve Hickox
    Attorney / President

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  51. How Can I 1031 Exchange and Develop the New Property?

    Question from a client

    Dear 1031x,
    I want to buy an parcel of land as a replacement property in a 1031 exchange. It is already sudivided and I want to build single family homes on the lots and sell them. How should I do this to maximize my tax savings.


    Dear C:
    You need to divide your investment activity from your development activity. Your investment entity should 1031 exchange into the new, subdivided parcel, as an investment. The development entity then develops the homes on the lots owned by the investment entity. When the property resells then the funds are split between the two entities. The investment entity may do another 1031 exchange upon this resale, while the development entity pays income tax on its profit.

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  53. How long do I have to purchase my replacement?

    The replacement property must be purchased within 180 days after the transfer of the relinquished property.

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  55. How should I take title to replacement property?

    Title to the replacement property must be taken by the same taxpayer in which the relinquished property was held. Caution dictates that this rule be followed even when husbands and wives are involved.

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  57. May I do a multiple leg exchange?

    Yes. Several relinquished properties may be exchanged for a single replacement property. One relinquished property may be exchanged for several replacement properties. The important thing is that the exchange be part of a unified exchange agreement from the beginning. The 45 day identification rule and 180 day replacement rule will start running from the date of the sale of the first relinquished property. Sometimes because of this timing issue it is better to structure the exchange as a series of exchanges rather than a multiple leg exchange.

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  59. May I exchange less than 100% of my interest?

    Yes. A fractional part of the relinquished property may be exchanged and/or a fractional part of the replacement property may be acquired.

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  61. May I have a partially tax deferred exchange?

    If the rule described in answer two above is violated, a partially tax deferred exchange is the likely outcome. If the exchanger trades down in either fair market value or equity then some gain is likely to be recognized. If the exchange is otherwise valid, a partially deferred tax exchange is the result. (Also see answer to question 4, below.)

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  63. Refinancing a mortgage

    Recent tax authority suggests that a refinancing of the relinquished property prior to sale with receipt of cash by the exchanger may not be deemed "cash boot" under certain limited circumstances. This allows the exchanger to balance equity in the relinguished and replacement property. In the event the exchanger needs cash for an independent business purpose, the exchanger can refinance the replacement property after acquisition and when the independent need for cash arises.

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  65. Security of 1031 Exchange Funds

    Security of our clients exchange funds is a question that our prospective clients often ask. Several of the defalcations by 1031 exchange companies occurred here in Colorado, including some by our close competitors and people that we knew. It really gave the business a black eye. Since then Colorado has passed probably the strictest laws regulating 1031 exchanges, they require a new bank account for each exchange so no co-mingling of funds is possible. Also the account is set up in a way that you sign to open the account and you also sign for ANY withdrawals. Our bank is very vigilant about checking withdrawal signatures against signatures used to create accounts. So you must authorize any withdrawal from your new 1031x account.

    Besides that, we have been in business since 1994 and have protected our client’s money through the years. We have handled over $1 billion dollars in exchanges without any loss of funds. You can trust us. Doing business with a Colorado based 1031 exchange company is now the prudent choice based on our state mandated controls

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  67. Using mortgage on principal residence to buy investment property

    Question from a client

    Dear Mr. Hickox: I purchased a one acre parcel of raw land two years ago for $72K. I bought this land using the equity from my primary residence so I now own the land free & clear but it increased my mortgage by $75K (including $3K for closing costs). I bought the land with the intent of building a home on it eventually. However my wife & I no longer wish to do this. If I were to sell the land for $125 & put all of that into my current mortgage would I still need to pay capital gains taxes on the profit of that sale?? In other words, does it make a difference to the IRS that I used my primary residence to get the raw land in the first place? Or, must I continue to buy other investment type property & never be able to put that money back into my mortgage? Thank You.

    Dear B: Your only option for not paying taxes on this sale is through a 1031x (1031 exchange). In order to pay no taxes you must trade equal or up in VALUE. If you really want to pay down the mortgage on your home (NOT a good idea in my opinion) you will have to pay tax on the gain ($125K-$75K= $50K gain). This would be taxed at 15% federal and 5% State of Colorado. Total estimated tax without a 1031x= $10K. I hope you will choose us for your 1031x services.

    Steve Hickox
    Attorney / President

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  69. How to identify and what constitutes sufficient identification?

    The replacement properties must be identified within 45 days after the transfer of the relinquished property. This requirement is strictly enforced, even if the 45th day falls on a holiday. Identification must be in writing, signed and dated by the exchanger and received by the QI no later than 45 days after the sale of the relinquished property. Replacement property must be identified unambiguously. Usually either a legal description or a mailing address is sufficient. Beware of an exchange where a exchanger identifies a property in whole and then closes on only a part of the whole. If challenged, this may not be sufficiently unambiguous identification for a successful exchange.

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  71. What Happens if I Trade Down in Value?

    Question from a client

    Hi,
    I purchased a condominium three years ago as an investment, for $145,000. Todays FMV is approximately $250,000, leaving me with a Capital Gain of $95,000 (using the calculator). I have found a new home which I would like to purchase, but the cost of this investment is only $160,000. Is there any way to qualify for a partial sale/exchange to minimize my taxes?

    Answer:
    Dear D,
    In your example, if you do a 1031 exchange, you would only be deferring tax on $15K. ($160 new FMV - $145 old basis) The only way to make a 1031 exchange really valuable to you is for you to buy a second property so the the value of the replacment properties is cose to or above the sale price of the relinquished property.

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  73. What is a related party and can I do an exchange with them?

    This is an evolving area in 1031 exchanges. Generally speaking, if an exchange where related persons swap properties then all exchanged properties must be held for a period of two years after the date of the last transfer or the exchange will not qualify for tax deferral. Related parties are defined as: lineal ancestors and descendants, brothers and sisters and other entities which the exchanger owns at least a 50% interest. In a deferred exchange, the exchanger cannot buy from a related party unless tax savings is not an issue. In a deferred exchange, the exchanger may sell to a related party.

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  75. What is boot?

    "Boot" is anything of value received by the exchanger which is not "like-kind" to the relinquished property.

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  77. What is meant by recaptured depreciation?

    Both 1031 exchanges and estate planning are about minimizing tax. 1031 exchanges allow real estate investors to hold onto their capital gains, deferring the income tax. This 'tax deferral' compounds the growth of investment portfolios. 1031 exchanges can, therefore, compound estate planning problems. Estate planning involves the movement of wealth from one generation to another while minimizing tax liability.

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  79. What must I do to have a fully deferred exchange?

    The general rule is that, in order to have a fully tax deferred exchange, the exchanger must trade equal or up in equity and equal or up in fair market value. The effect of this rule is that the exchanger must use the entire net proceeds from the relinquished property as down payment on the replacement property. Also, the exchanger must replace any mortgage paid off at the sale of the relinquished property with an equal or greater mortgage on the replacement property. Any cash received by the exchanger whether at the sale of the relinquished property or at the purchase of the replacement property will be deemed "cash boot" and tax will be recognized to the extent of gain. This rule applies regardless of the exchanger's cash position in the relinquished property. Regardless of the size of the exchangers down payment, principal pay down, or capital improvements on the relinquished property, the exchanger will be treated as having received "cash boot" if cash is received as part of the exchange. The fair market value of the relinquished property can be calculated from the selling price by subtracting from the selling price the transaction costs of the sale. These transaction costs are limited to those costs directly related to the sale of the relinquished property. The most common transaction costs are brokerage fees, title insurance fees, exchange service fees, and recording fees.
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  81. What property is like kind to my property?

    When it comes to real estate, all real property is like kind to all other real property. For example, farm land can be exchanged for an office building, a condominium can be exchanges for a trailer park. The definition of real estate will be defined by the state law of the jurisdiction in which the property is located. Our business focuses on exchanges of real estate. Certain other tangible personal property can be exchanged, like airplanes and equipment. Whether this property is like kind is determined by reference to certain industrial classifications. We can handle exchanges of real estate or personal property.