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How much does it cost to do an exchange?
The exchange fee for a Basic Exchange is typically $750 for a two property exchange, with no interest paid to the exchanger. Additional properties exchanged are typically an additional $250 per property.
Please note that Team Aguilar does not set or charge the fee – all exchange fees are paid to a third-party escrow company that facilitates the 1031 Exchange.
When must the investor make his decision to finalize the exchange?
The decision to complete the exchange must be made before closing on the relinquished property. The exchange agreement has to be finalized and delivered to all parties before the relinquished property title transfer takes place.
Is it possible for proceeds from the sale of the relinquished property to be held in escrow at closing?
Proceeds from the sale of the relinquished property can only be delivered to a "qualified intermediary". It is not possible for the proceeds to be held in escrow, unless the escrow account is in the form of either an independent "qualified escrow account" or "qualified trust account" not under the control of the investor. Any notion of the investor having control of the proceeds during the exchange process would be considered to be “constructive receipt.”
What is the 45-day identification period and when does it begin?
Section 1031 mandates a period of 45 days after closing on the relinquished property in which a replacement property has to be identified. This 45 day time limit is strictly enforced – going beyond it will destroy any chances of a tax deferral.
What is the 180-day exchange period and when does it begin?
According to Section 1031, a replacement property has to be bought within 180 days after closing on the relinquished property OR before the due-date of the investor’s tax return, whichever comes first. The purchase date of the replacement property is considered the closing date for the exchange period. If a tax return due date happens to fall before the 180 day time-limit, a tax-return extension can be filed. Keep in mind that it is not possible for a tax payer to amend their returns for extension purposes.
Is there any way to get an extension for either the 45-day period or the 180 period?
No, the IRS holds firmly to the deadline dates and will not allow any deviations from the 45-day or 180-day time limit.
What happens if the 45th or 180th day falls on a holiday or weekend – is it possible to get an extension to the next business day?
No. As per the IRS rules, the timelines are calculated based on calendar days – it does not matter if the 45th or 180th day falls on a weekend or holiday. No extension will be given.
When does the IRS consider a 1031 exchange to be completed?
Only when the exchanger has acquired title to all of the identified replacement property(s) to which the exchanger is entitled, and provided it happens within the 180 day time period, is a 1031 exchange considered complete.
Can vacant land be considered as like-kind property?
Yes, vacant land qualifies as like-kind with all other types of real estate. That being said, vacant land (along with all types of properties) must have some productive use in a business or for investment purposes to qualify for a 1031 Exchange.
If the relinquished property is classified as residential income property, does the replacement property also need to be residential income property?
No. The like-kind requirement is fairly flexible and allows for a lot of leeway on the kind of property acquired in an exchange. A residential income property, for example, may be exchanged for commercial property, commercial property for industrial property or even a vacant lot for residential income property. The like-kind requirement allows for any combination of properties to be exchanged. Each property involved in the exchange, however, must have some productive use in a business or investment purpose.
What are the requirements for deferring tax on a capital gain?
To successfully gain a tax deferment from the sale of an investment property in a 1031 Exchange, the following criteria have to be met:
- Both the relinquished and replacement properties must meet “like-kind” requirements (see above) and must be held for productive use in a trade or business or for investment.
- The exchange has to take place within the mandated timelines.
- All the proceeds from the sale of the relinquished property has to be used to purchase the replacement property, and the fair market value of the replacement property has to be equal to or exceed the sale price of the relinquished property..
If either (1) or (2) are not met, no exchange is possible. If any part of (3) is not met, the taxpayer may be eligible for a partial deferment on capital gains tax but not a full one.
Am I required to have a mortgage on the replacement property?
No. It is to the investor’s advantage if the replacement property has mortgage debt of equal or greater value than the mortgage debt on the relinquished property. If the replacement property’s debt is of lower value than that of the relinquished property, mortgage boot is said to occur, a situation where the difference in debt will be taxable. To get out of such a situation the investor may contribute cash out-of-pocket to the purchase of the replacement property. Cash contributions offsets net debt relief and help avoid a mortgage boot.
I have identified my Replacement Property but have not sold my investment property. Can I still do a 1031 exchange?
Yes, a reverse exchange would be applicable in such a situation. Reverse exchanges are facilitated by an intermediary, acting as an Accommodating Titleholder (AT), acquiring title on one of the properties. While reverse exchanges are accepted by the IRS, they are one of the more complex exchanges to pull off, so please do not hesitate to contact us to discuss the issue in more depth.
Do I need to amend my sale and purchase contracts when conducting a 1031 Exchange? Does my Realtor need to mention the 1031 Exchange on the MLS listing of my property?
No. There is no provision in tax law that requires changing the sales or purchase contracts or requires changing the MLS listing. However, in order to complete an exchange, both parties to the sales and purchase contract must agree to an assignment of contract rights from the exchanging party to the qualified intermediary. Although the assignment of rights does NOT effect the party not involved in the exchange, both parties still must agree to the assignment of contract rights from exchanger to intermediary. In order to prevent any surprises at closing, it is probably wise to insert language into the sales and purchase contracts that stipulate the transaction involves an exchange. Inserting language into the MLS listing, however, does not create a contractual obligation and does not add any security to the exchange.