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 both personal property (equipment, vehicles, machinery) and real property (real estate).
How much should the property that I’m selling be worth, for it to make sense to participate in a 1031 Exchange?
In general, if you’re selling and replacing property that will result in at least $5,000 in normal gains or $10,000 in capital gains, a 1031 Exchange may make 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.
How is a 1031 Exchange for equipment different than a 1031 Exchange for real estate?
Really, there are only minor differences. The basic process of the 1031 Exchange is the same, except that instead of relinquishing (selling) and acquiring (buying) real estate, you’re doing so with other types of assets (as an organization or an individual).
What types of property qualify for a Section 1031 Like-Kind Exchange?
Section 1031 of the Internal Revenue Code (IRC) allows for Exchanges of nearly all types of properties/assets, as long as what you’re relinquishing (selling) and acquiring (buying) are held for business or investment use and are located or predominantly used in the United States or its territories. Allowable properties include: real estate of all types (vacant land, rental properties, commercial properties, etc.), 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 in a 1031 Exchange 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 to facilitate the 1031 Exchange, all 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 equipment, 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. For personal property 1031s (non-real estate), the IRS uses two classification systems to define like-kind assets, with a “like-purpose” or “like-use” determination invoked in certain situations (i.e. a draft horse and a plow are very different in many ways, but the IRS ruled them as like-purpose since both till soil). The first system is General Asset Class (GAC), and includes these 13 categories:
- Office furniture, fixtures, and equipment (Class .11)
- Information systems (Class .12)
- Data handling equipment, except computers (Class .13)
- Airplanes (airframes and engines) except those used in commercial or contract carrying of passengers or freight, and all helicopters (airframes and engines) (Class .21)
- Automobiles, taxis (Class .22)
- Buses (Class .23)
- Light general-purpose trucks (Class .241)
- Heavy general-purpose trucks (Class .242)
- Railroad cars and locomotives, except those owned by railroad transportation companies (Class .25)
- Tractor units for use over-the-road (Class .26)
- Trailers and trailer-mounted containers (Class .27)
- Vessels, barges, tugs, and similar water-transportation equipment (Class .28)
- Industrial steam and electric generation and/or distribution systems (Class .4)
If your property does not fall into one of the above GACs, then the second system is referenced: the North American Industrial Classificaiton System (NAICS, pronounced “nakes”). For purposes of determining like-kind treatment within NAICS, which contains hundreds of categories, please consult with EquipEx.
Why haven’t I heard of 1031 Exchanges for equipment?
Qualified Intermediaries and 1031 Exchanges are more widely known in the realm of real estate dealings, but the option to use a 1031 Exchange to defer taxes on reinvestments of capital equipment and other personal properties is fully allowable under the Internal Revenue Code. Section 1031 was written into the Internal Revenue Code in 1921. Originally, some of the language in Section 1031 was cryptic, which limited its use outside of real property transactions. Subsequent revisions, mostly in the 1980s and 1990s, brought clarification and broader application by U.S. taxpayers of all shapes and sizes.
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 adds minimal time and work for the Exchanger and other parties involved. An Exchanger completing their first “1031” should plan on an hour or so to review and execute Exchange Agreement documents with the QI (Qualified Intermediary) and an extra 15 minutes or so 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 IRS 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!
Have a specific question or situation to discuss?
Give us a call to ask a quick question or 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.x1501093669epiuq1501093669e@ofn1501093669i1501093669.
Located in 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.