1031 Frequently Asked Questions (FAQs)Below are FAQs about 1031 Exchanges and Qualified Intermediaries. Have a question not covered below? Please call or email anytime.
Why should I choose EquipEx as the Qualified Intermediary to handle my 1031 Exchange?
1031s are all we do and we do them expertly! EquipEx is a dedicated Qualified Intermediary that provides the most thorough and personable service in the industry. Our Certified Exchange Specialist® will spend as much time as needed for you and anyone else involved in your Exchange to feel completely comfortable with the process. Our Exchange fees are highly competitive and we have substantial experience facilitating 1031 Exchanges for all types of real property (real estate).
How much taxable gain does it take for it to make sense to participate in a 1031 Exchange?
In general, if you’re selling property that will result in at least $15,000 in normal gains or $10,000 in capital gains, a 1031 Exchange may make financial sense. We strongly recommend that you consult with your tax professional regarding your particular situation and objectives before entering into a 1031 Like-Kind Exchange.
What types of property qualify for a Section 1031 Like-Kind Exchange?
As of January 1, 2018 and due to the passing of the “GOP Tax Reform Bill”, Section 1031 of the Internal Revenue Code (IRC) is allowed for Exchanges of nearly all types of real estate. Such property must be held for business or investment purposes and located or predominantly used in the United States or its territories. Properties no longer eligible for Section 1031 treatment include: transportation assets (trucks and automobiles of all shapes and sizes, aircraft, watercraft, locomotives and railcars, trailers and containers), construction and mining equipment, farm implements, machinery, tools, collectibles (autos, race horses, coins, jewelry, etc.) and certain intangible assets such as licenses and patents. A few types of properties not allowable since the inception of Section 1031 are ownership interests, stocks and bonds. If your property/asset to be sold has residual value and taxable gain, consider boosting your cash flow and return on investment with a 1031 Exchange!
Is the 1031 Exchange a “tax loophole”?
The 1031 Exchange is a legitimate part of the Internal Revenue Code, implemented to encourage reinvestment of proceeds from the sale of one or more properties into other, similar property or properties. When an Exchanger sells a business-use or investment asset, typically using a Qualified Intermediary (QI) to facilitate the 1031 Exchange, income and capital gain taxes are deferred and cash flow preserved in accordance with Section 1031 of the Tax Code, provided that a “like-kind”, or in some cases a “like-use”, asset of equal or greater value is acquired.
If I’ve already sold or replaced property, or am in the process of doing so: can I still qualify for a 1031 Exchange?
The answer is: “it depends.” If ownership of the property has been transferred by title (or deed), payment or use, it’s too late to participate in a 1031 Exchange for that property. However, if you haven’t finalized the sale and haven’t received or paid funds, you likely have time to open a 1031 Exchange for the upcoming transaction by engaging the services of a Qualified Intermediary. A Reverse 1031 Exchange might also be possible – this type of Exchange allows you to acquire one or more assets before you’ve relinquished your old asset(s).
What does “like-kind” mean – how similar do my outgoing and incoming assets have to be to qualify for a 1031 Exchange?
In 1031 Exchanges, “like-kind” is a fairly broad term. Any real estate property is considered like-kind to another property as long as it’s held for business or investment use and is located on U.S. soil. For example, an Exchanger can sell an apartment building in Alaska and purchase a vacant lot in Florida and/or a warehouse in Maine.
If I sell one property/asset in a 1031 Exchange, can I acquire more than one replacement property/asset with the proceeds?
Yes, you can sell any number of properties within a 1031 Exchange and purchase the same number or a different number of properties, with complete tax deferral, as long as your expenditures are equal to or greater than your proceeds and your amount of debt is not relieved. For example, you could sell a building for $500,000 and buy a building for $300,000 and a parcel of vacant land for $200,000. Any proceeds not reinvested, or debt relieved, will be considered taxable “boot” by the IRS at the conclusion of your 1031 Exchange, and taxed at the rates that would have been applicable without the Exchange.
How involved is the 1031 Exchange Process?
The typical 1031 Exchange, when managed properly by an experienced Qualified Intermediary (QI) such as EquipEx, adds minimal time and work for the Exchanger and other parties involved. An Exchanger completing their first “1031” should plan on an at least an hour or so to review and execute Exchange Agreement documents with the QI and an extra 15 minutes minimum for each sale and purchase relating to the Exchange. Related buyers and sellers have only to receive a notification document and to see their funds move to or from the Exchanger’s Exchange Value Account (EVA, as managed by the QI on behalf of the Exchanger). Finally, the Exchanger’s tax professional will complete an IRS form, usually Form 8824, which provides value and basis information on 1031 assets exchanged. This form accompanies the Exchanger’s federal tax return; time involved depends on the number of assets exchanged and accessibility to asset details (when purchased, price paid, depreciation taken, remaining depreciable life at time of sale, etc.). The typical time and dollars invested are small in comparison to the financial benefits garnered!
What is the “nanosecond” rule?
The “nanosecond” rule is merely a collaborative opinion on the part of some tax and Section 1031 experts, which refers to how long an Exchanger needs to wait before entering into a cash out refinance, after closing on a replacement property. The logic behind this “rule” is that once an Exchanger owns the replacement property and refinances it, thereby incurring a repayment obligation, they are in the same position as anyone else owning property and refinancing it. Most experts caution that the Exchanger should not arrange refinancing while completing acquisition of the replacement property, nor have it pre-arranged prior to the acquisition. Best practice is to start the cash out refinance process any time after completing the replacement property acquisition.
Have a specific question or situation to discuss?
Give us a call to ask a quick question or to schedule a Free, No Obligation 1031 Exchange Consultation. We’ll be happy to provide as much objective information about 1031 Exchanges, and the role of EquipEx as your Qualified Intermediary, as possible. You can reach us at (720) 266-6095 in the Denver area, (855) 313-7080 nationwide, or e-mail moc.x1516246567epiuq1516246567e@ofn1516246567i1516246567.
Located in metro Denver, Colorado, EquipEx is a Qualified Intermediary (QI) for Section 1031 Like-Kind Exchanges locally and across the U.S. As a responsible QI, EquipEx cannot and does not provide tax advice. Please consult with your tax professional regarding your particular situation and objectives before participating in a 1031 Like-Kind Exchange.