Learn More About the 1031 Exchange

A valid 45-day identification is a written list of your possible replacement properties, signed by you and delivered to the right party by midnight on day 45. Each property has to be described clearly enough that there's no question which one you mean, and the list has to fit within one of three identification rules. Get any of those pieces wrong and the IRS can treat your identification as if you never made one, which ends the exchange. The good news is that every one of the

When you sell a property in a 1031 exchange, your sale proceeds go to your Qualified Intermediary (QI), and they stay there until you buy your replacement property. That can be up to six months. The most important question to ask when choosing a QI is simple: how will my money be protected while you hold it? Why fund protection matters There's no federal license for Qualified Intermediaries, and the IRS doesn't supervise how a QI holds client funds. A handful of states, inclu

The short answer: call your Qualified Intermediary once you're under contract to sell, and always before the sale closes. If you can start the conversation when you list, even better. Here's why the timing works the way it does. The one deadline you can't miss Your exchange has to be set up before your relinquished property closes. That means the exchange agreement is signed and the sale contract is assigned to your QI before escrow closes. If the sale closes first and the pr

Yes, you can use a 1031 exchange to step back from being a landlord without paying tax on the sale. You can exchange a property you manage yourself into one that needs less of your time, or into a Delaware Statutory Trust (DST) where someone else manages it entirely. When active ownership starts to wear Many investors reach a point where tenant calls, repairs and turnover aren't worth it anymore. Selling outright can mean a large tax bill, especially on a property owned for y

If you sold investment property in an exchange last year, it gets reported on your tax return even though the gain is deferred. A deferred gain isn't an unreported one. Here's what to go over with your CPA. Form 8824 goes with the year of the sale Every exchange is reported on IRS Form 8824, filed with your return for the year your relinquished property sold. That's true even if you bought your replacement property the following year. At the end of your exchange, we send you

The start of the year is a good time to look at your real estate holdings and decide whether this is the year to sell. If an exchange might be part of that, a little planning now makes the rest of the year easier. Here's a short checklist. 1. Wrap up any open exchange If you sold last fall and haven't finished your exchange, your 45 and 180-day deadlines keep running into the new year. If your sale closed after about October 17, your 180th day falls after April 15. Let your C

A 1031 exchange doesn't have to be one property for one property. You can sell several properties and buy one, or sell one and buy several. Both work, and both defer the tax, as long as you follow the same rules. Why some investors consolidate Consolidating means exchanging several smaller properties into one larger one. Less to manage. One roof, one set of tenants, one property tax bill instead of several. Easier to hire help. A larger property can make professional manageme

A 1031 exchange lets you sell property that no longer fits your plans and buy property that does, without paying capital gains tax on the sale now. That makes it one of the most useful tools for rebalancing a real estate portfolio. Why portfolios drift Over time, a portfolio can end up out of balance. One property appreciates and becomes most of your net worth. A market softens. A building needs more management than you want to give it. Selling to fix any of that normally mea

If you're selling investment property in the last few months of the year, there's one timing issue to plan for before your sale closes: your tax return due date can cut your exchange period short. The tax return due date rule Your exchange period ends 180 days after your sale closes, or on the due date of your tax return for that year, whichever comes first. For most of the year, 180 days comes first and this never matters. In the fall, it does. For individuals, a sale that c

Most 1031 exchanges are forward exchanges: you sell first, then buy. But sometimes the right replacement property shows up before your sale is ready, or the property you want needs work before it fits your plans. That's where reverse and improvement exchanges come in. The four exchange types Forward (delayed) exchange. Sell, then buy within 180 days. This is by far the most common. Simultaneous exchange. Both closings happen the same day. It still needs exchange documents in

The 1031 deadlines are strict, but they aren't complicated. Most timeline problems come from a few misunderstandings that are easy to avoid once you know about them. Mistake 1: Thinking the clock starts at contract Some investors assume the 45 and 180-day periods start when they go under contract or start looking. They don't. Both start the day your relinquished property closes. That's day 0. The flip side matters even more: your exchange has to be set up before that closing.

A Delaware Statutory Trust (DST) lets several investors own fractional interests in a property, or a group of properties, managed by a sponsor. Under IRS Revenue Ruling 2004-86, a properly structured DST interest counts as real property, so it can be replacement property in a 1031 exchange. DSTs work well for some investors and poorly for others. Here's a balanced look. The pros No management. The sponsor handles leasing, maintenance and operations. For investors who are done

New to 1031 exchanges? This beginner-friendly guide explains how to defer capital gains taxes, what qualifies, and how to complete a 1031 exchange step by step.

Yes. You don't have to reinvest every dollar to do a 1031 exchange. In a partial exchange, you keep some of the proceeds, or buy a less expensive property, and pay tax on that portion while deferring the rest. How a partial exchange works Anything you receive in an exchange that isn't like-kind property is called boot, and it's taxable. In a partial exchange, boot usually comes from one of three places: Cash you keep from the sale proceeds Buying down, where your replacement

Any real property held for investment or for use in a business can be exchanged for any other real property held the same way. A rental house can become an apartment building, a strip center, farmland or an interest in a Delaware Statutory Trust. "Like-kind" is much broader than most people expect. Here are the most common options and what to keep in mind with each. Single-family rentals Easy to finance, easy to understand and easy to sell later. Many investors exchange one l

Most 1031 exchanges go smoothly. When they don't, it's usually for one of a handful of reasons, and nearly all of them can be avoided with a little planning before the sale closes. 1. Not having the exchange in place before closing The exchange has to be set up before your relinquished property closes, with the proceeds going directly to your Qualified Intermediary. If the sale closes and the funds come to you first, the exchange is off the table. There's no fix after the fac

It depends on how you use it. A vacation or second home that you mostly use yourself doesn't qualify, because it isn't held for investment. A property that's rented out with limited personal use can qualify. To give owners clearer guidance, the IRS created a safe harbor for vacation and second homes. Meeting it is the strongest way to show the property was held for investment. The safe harbor for a property you're selling To exchange a vacation home you own, you need to have

A 1031 exchange lets you defer the tax on the sale of investment real estate, but how much you defer depends on what you buy and how much you reinvest. To defer all of it, you need to get two things right. 1. Buy at least as much as you sold Your replacement property, or properties, should cost at least as much as the net sales price of what you sold. If you buy for less, the difference is generally taxable. You can buy more than one property to get there. Many investors spli

A property qualifies for a 1031 exchange when it's real estate held for investment or for use in a trade or business. The property you sell and the property you buy both have to meet that test. The good news is that "like-kind" is broad. It refers to the nature of the property, not its quality or type. Almost any U.S. investment real estate can be exchanged for almost any other U.S. investment real estate. Properties that typically qualify Single-family and multifamily rental

A 1031 exchange has two deadlines: 45 days to identify your replacement property and 180 days to complete your purchase. Both start the day your relinquished property closes, and both run at the same time. Day 0: your sale closes The clock starts when your relinquished property closes. Your exchange has to be set up before this point, with your sale proceeds going directly to your Qualified Intermediary. If the funds come to you first, the sale can't be converted into an exch