FAQs of a 1031 Exchange

The 1031 exchange must only be used for investment or business property. You will NOT be able to swap your personal (Primary) home for another home. It’s a small loophole, but it is possible under a 1031 exchange to swap vacation homes.

Prior to December 22, 2017 some exchanges of personal property qualified for the 1031 exchange such as franchise licenses, aircraft, and equipment. The exchange of corporate stock or partnership interests were never on the list of qualifying entities. However, interests in TICs (tenants in common) still do qualify.

“Like-kind” can be a puzzling phrase that doesn’t always mean what you think it does. When it comes to like-kind properties, you can exchange an apartment building for raw land, or a ranch for a strip mall. It is a liberal regulation and you can even exchange a business for another business.

Typically, an exchange comprises the trade of one property for another among two people. However, the odds of finding the property that you are looking for and the one that someone wants from you isn’t always simple. Therefore, most exchanges are delayed, three-party, or “Starker” exchanges (which is named for the first tax case that permitted them). A delayed exchange involves a QI who would hold the cash after the sale of your property and in turn uses it to purchase the replacement property for you.

Once your property has been sold, the cash from the sale must go to an intermediary and not you. Within 45 days of the sale you must designate a replacement property in writing to the intermediary with the details of the desired property. You can designate more than one property within the timeframe, but you must close on one of the designated properties.

Along with the 45-day property designation, you’ll have 180 days to close on that property. The time periods run concurrently, which means the clock starts ticking at the close of your sale. If you designate property replacement under the 45-day period, you have the remainder of the time to close on the replacement property.

To the extent that you do not exchange even or up in value and/or exchange even or up in equity and debt, you will have received non-qualifying property (“boot”) in your exchange.  If boot is received, tax is computed on the amount of gain on the sale or the amount of boot received - whichever is lower.

One way to get in a little trouble with the exchanges is not considering loans on the surrendered replacement property. For instance, if you were to have a $500,000 mortgage on the old property and the new property in the exchange is only $400,000, then the extra cash is considered a gain or “boot” and therefore will be taxed.