1031, 1031 Exchange, Real Estate, Property, Business Property, Tax Planning, Capital Gains, Qualified Intermediary, Cash Flow, Tax Savings, New Families, Mid-Lifers, Near-Retirees, Retirees, Business Owners 1031, 1031 Exchange, Real Estate, Property, Business Property, Tax Planning, Capital Gains, Qualified Intermediary, Cash Flow, Tax Savings, New Families, Mid-Lifers, Near-Retirees, Retirees, Business Owners

F.A.Q.


A §l031 Exchange, authorized by §1031 of the IRS Code, is a transaction in which a taxpayer can exchange one investment property for another, of equal or greater value, by deferring the tax repercussion of a sale. The IRS Code reads:
"No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment, if such property is exchanged solely for property of like kind, which is to be held either for productive use in a trade or business or for investment."

  • You simply cannot sell a property, directly buy another and expect to defer capital gains taxes without a QI. The IRS - Section 1031 specifies, that neither you, nor your; parents, children, or siblings can act as an intermediary for any 1031 transaction. This act prohibits anyone regarded as your "agent" such as; your attorney, broker, CPA or real estate agent, from serving as your QI, unless this person has not represented you within the past two years.
  • A Qualified Intermediary is essential to the completion of a successful 1031 exchange. Technically, he or she sells your property on your behalf, buys the new replacement property, and then transfers the deed to you. It is the QI's responsibility to hold the proceeds, prepare the legal documents, and attempt to ensure that the transaction is completed within the IRS guidelines.

    To preserve tax deferral benefits and complete a successful 1031 exchange, you, the (seller or exchanger) must execute a written agreement with a Qualified Intermediary before closing on the sale of your existing property, known as the relinquished property.
  • Following is a detailed point-by-point explanation of what a Qualified Intermediary does for you during a 1031 exchange.

    • Coordinates with you (the seller or exchanger) and any adviser on the structure of the 1031 exchange.
    • Prepares documentation concerning the relinquished property and the replacement property.
    • Provides instructions and the appropriate documents to the escrow or title company concerning the exchange.
    • Creates an arm’s-length transaction in the agreement between you (the seller or exchanger) and the Qualified Intermediary, transfers the property you are selling to the QI, who then conveys the property to the new buyer.
    • Takes control of the funds from the sale of the relinquished property and typically deposits these funds into a separate and insured account.
    • Does not allow you, the seller, to take constructive receipt of the funds from the sale.
    • Holds the funds from the sale of the relinquished property during the 45th-day identification period.
    • Receives and holds the written information about potential replacement properties.
    • When the replacement property has been selected, transfers your funds for the purchase and disburse them to the title or escrow company for its purchase.
      Acquires the replacement property in the QI's name and then conveys title to you (the seller or exchanger) by deed.
    • Submits a complete accounting of the 1031 exchange for your records.
    • Submits a 1099 to you (the seller or exchanger) and the IRS for any paid growth proceeds (interest earned).

    When it is time to sell an investment property (i.e. expectations were met, properties fully depreciated, time to retire from active management, etc.), there are many factors to consider. Whether an investor is seeking to maximize gains, looking to increase the level of income or seeking to expose of an under performing asset, simply liquidating a property can create several taxable and recapture liabilities and obligations. Investors are taking the first step in maximizing investment results by executing a 1031 exchange. Within some of the highest tax brackets, simply “cashing out” can erode up to 40% of gains on profitable, low basis assets on a combined state and federal level. With guidance from the Internal Revenue Service, investment sponsors construct securitized “real property” investments for use as a suitable replacement property in a 1031 exchange.

    By reinvesting sale proceeds into a securitized, fractional real property program, investors may:


    • Defer tax liabilities indefinitely.
    • Keep investment dollars fully invested.
    • In many cases, improve upon the grade and quality of holding.
  • A tax deferred exchange is a transaction involving the sale or purchase of an investment property or property help for productive use in a trade or business which meets requirements of section 31 of the internal revenue code and qualifies for non-recognition of gains or loss, technically the exchange is tax deferred, not tax free, since the gain deferred in the transaction will be recognized on the ultimate sale of the replacement property received in the exchange. During a tax deferred exchange, the investor may not have constructive receipt of their exchange funds. Therefore, a qualified intermediary (QI) as an independent third party, is needed to facilitate a 1031 Exchange Transaction and hold the funds on behalf of the investor.
  • When structuring an exchange, there are two critical time limitations that begin on the day that the original property was sold.
    • A) 45-day identification period to locate a potential property.
    • B) 180-day period to acquire the property.

    It is important to note that the identification period and the closing period do run concurrently and make no concession for weekends and holidays.
    In addition to the time limitation, when completing an exchange, investors must also consider the value requirement. There is a general rule-of-thumb used in order to meet the exchange value requirement for full deferral treatment:
    Any cash and/or debt received from the relinquished property must be reinvested into the replacement property. The only exception to the above is with the investment of new cash to replace any or all the dept received. Additional debt, while allowed when acquiring a replacement property, does not get an exchange to the value requirement if cash is withdrawn from the transaction.
    • Income paid monthly (with most sponsors).
    • Help to reduce the stress of mandated 45 and 180-day 1031 exchange deadlines.
    • The ability to partially shelter income through proportional participation in interest deductions and proprietary depreciation.
    • No day-to-day management.
    • Professional property and asset management.
    • Commercial assets available nationally.
    • Quarterly and annual performance reporting and analysis.
    • Ability to utilize IRC 1031 again in the future upon disposition of current, securitized, fractional real property investment.
    • Pre-arranged financing with non-recourse loan structure in most cases.
    • Greater disclosure requirements than needed in traditional real estate investments.
  • A DST (or Delaware Statutory Trust) is an entity that is used to hold title to investment real estate. $100,000 is the typical minimum investment requirement for a DST 1031 exchange. An investor may diversify his or her exchange proceeds among multiple properties.
  • In order to avoid being taxed under section 1031, all proceeds received from the sale of a property must be transferred to a qualified intermediary, other than the seller of the property (Like Great Point Capital Exchange). The qualified intermediary transfers funds to the seller of the replacement property or properties. A qualified intermediary is a person or company that agreeably facilitates the 1031 exchange by holding the funds involved in the transaction until they can be transferred to the seller of the replacement property.
    From the time of closing on the renounced property, the investor has 45 days to elect a potential replacement property (or properties) and a total of 180 days from closing to acquire the replacement property. The investor must identify the replacement property prior to midnight on the 45th day.
    A standard 1031 exchange allows investors to sell their property before acquiring a new resource. 1031 exchanges allow investors to keep their money working for them. 1031 exchanges allow investors to reinvest 100% of their money right away; however, in the event they “cash out” they will pay capital gains taxes.
    Once its established that an investors property is no longer a primary residence, but a rental property, a 1031 exchange can be completed and all the capital gains from a sale of that residence property can be differed.
  • Investors can take advantage of the 1031 tax-deferred exchange to purchase a more valuable investment property. The investor can utilize the money they would have paid to the IRS in taxes, they can increase their down payment, boosting their overall purchasing power to acquire a more expensive replacement property.
  • Taking its name from Section 1031 of the Internal Revenue Code, a tax-deferred exchange allows a taxpayer to sell an income, investment or business property and replace it with a like-kind property. Capital gains on the sale of this property are deferred or postponed if the IRS rules are assiduously followed.
  • Universally, you cannot sell "relinquished property" and defer the payment of your depreciation reclaim and capital gain income taxes by structuring a 1031 exchange, building on “real property” that you already own or by paying off the mortgage on the property.

    Institutional Qualified Intermediaries usually charge a transaction fee in the range of $850.00 to $1,200.00 for each 1031 Exchange transaction. This fee usually includes one sale property or "relinquished property" and one purchase property or "replacement property".
  • A vacation property may qualify for a 1031 exchange; however, definitive rules must be followed. The property must be rented for a minimum of two weeks to a non-relative, for a minimum of two years prior to and after the exchange.
  • An investor cannot exchange one LLC or partnership interest for another LLC or partnership interest and defer the gain using a 1031 exchange. The party implementing the exchange needs to be the entity itself. So, the LLC would need to sell the property and purchase the replacement party.
  • Ordinarily, an investor cannot sell "relinquished property" and defer the payment of the depreciation recapture and capital gain income taxes by constructing a 1031 exchange, by building on real property the investor already owns or by paying off the mortgage on the property.
  • An investor cannot take out their equity before the 1031 exchange. The “cash-out” is only adequate if the investor pay’s taxes on the equity pulled.
  • A like-kind property consists of two properties of the same type, making an exchange between the two, tax deferrable. The two assets must be of the same type with varying quality, to qualify as like-kind property.
  • The laws of 1031 allow for an exchange of one plot of land for another, using funds obtained thorough a land sale; however, certain rules and regulations behest the terms under which land can be sold and the specific use and purpose of it.
  • The tax code requires identifying the replacement property in order to qualify for a 1031, tax differed exchange. The documentation can be hand-delivered, mailed or telecopied, prior to the end of the45 day identification period.
  • According to the law an investor can establish up to three properties without limitations. The identification rules of a 1031 exchange provide that you can establish three properties without limitations. An investor can sell their Old Property for a price and establish three new properties of equal or greater value.
  • Whether an investors property is held with or without income or it’s an investor trade or business, it will qualify for a tax-differed exchange treatment.
  • When utilizing a non-primary property as a vacation/second home, the qualifications for a tax deferrable asset of a section 1031 exchange, require that the property is utilized as a rental and not for personal use only. An investor can find deductible mortgage interest and real estate taxes on Form 1040 Schedule A of the federal tax return.
  • “A stepped-up basis” (Means at the fair market value at the time of death) allows heirs the opportunity to only pay capital gains tax on the difference between the value when inherited and the sale price when the property is sold. This is the one “sure way” of gaining equity and not getting taxed on the asset. Under Section 121 of the Internal Revenue Code, if an investor owns a property and retains the property for at least 60 months and 24 of these months were used as an investor’s primary residence, if single, the investor is entitled to a $250,000 exclusion on the sale of the property. This takes effect only if the investor has not taken an exclusion within the past 24 months. If married and filing jointly, the married couple is designated a $500,000 exclusion.
  • Partners can conduct a 1031 exchange, however there are restrictions. Partners cannot utilize their interests in a property to conduct a 1031 exchange individually. This can only be done, with all investors simultaneously utilizing the asset to exchange for a like-kind investment. Individuals can cash out prior to the exchange, however there will be some complex tax issues that will occur and need to be addressed. If one or more of the partners wants to cash-out and the remaining partners want to make an exchange, the remaining partners need to utilize the property as a rental for 24 months prior to making a like-kind exchange.

    A 721 exchange allows investors the opportunity to avoid taxes and keep their fortune working for them by collaborating with an Estate Planner, creating a REIT. The 721 exchange can be utilized as an estate planning tool to prepare an investor's real estate capital to be handed down to heirs.
  • REIT’s are corporations that own and manage a portfolio of real estate properties and mortgages. Individual investors can purchase shares in a publicly traded REIT. Like partnerships, REIT’s cannot do an exchange at the individual level, only at the corporate for a like-kind real property.
  • Seller is an agreement between the buyer and seller, the buyers requests the Seller’s corporation in an exchange and agrees to hold the Seller harmless from all claims and costs. If an investor directly receives income from the sale, the investor will disqualify themselves from the 1031 exchange tax deferment. If the exchange’s replacement property was owned by the investors relative, the property cannot be sold for two years in order to keep the tax benefits of the 1031 exchange.
  • The money or the fair market value of "other property" received by the investor or taxpayer, in an exchange, is considered or called a “Boot.”
  • Section 1031 provides that property held for use in a trade for business or investment does not provoke the capital gains tax if it's exchanged for a “like-kind” business or investment property.
  • Trusts are often involved in Internal Revenue Code “IRC” Section 1031 exchanges. How the exchange is made depends on who the taxpayer is, typically the trustee holds legal title to the property and can make the exchange, this depends how the trust is structured with the “grantor” and beneficiaries. GPC1031 Exchange can help you investigate to determine your best options.
  • An investor living in a unit more than 14 days, within a tax year, is considered a “Dwelling Unit” resident of the property and possesses limitations with expenses that can be deducted.
  • Homeowners leaving their property to live somewhere else now have 18 months to sell the original property while deferring a capital gains tax.
  • Single-member entities will be treated as a disregarded entity. The taxpayer may take title to replacement property in the form of an LLC to satisfy loan requirements and not be in danger of an exchange disqualification under Section 1031 treatment.