A 1031 exchange allows investors to defer capital gains taxes on sales of their investment properties. There are strict rules that the IRS has put into place that need to be followed in order for an exchange to be successful/allowed. I work with seasoned investors as well as new investors, here are the most common questions I get:
- Can my primary residence qualify for a 1031 exchange? No. 1031 exchanges are meant for investment properties. If this is a property that is multiunit and you live in a unit, then it may qualify for a partial 1031 exchange, but talking to your tax advisor will help sort out what makes the most sense.
- Are second homes and vacation properties eligible for 1031 exchanges? Possibly. The IRS states that a property cannot be utilized by the owner more than 14 days, or 10% of the time it is rented out, in a given year. Example, you never rent out a property, you are allowed to spend up to 14 days in it and it will still qualify as an investment property. You hit day 15, it no longer is considered an investment property. However, if you rent out your property for 200 days of the year, you are allowed up to 20 days of personal use and it still would qualify as an investment property.
- The investment property I purchase must be the same type of property that I sold in order for the exchange to be valid? The IRS states that the properties exchanged be “like-kind” and that can cause much confusion. The reality is that “like-kind” simply means that the properties have to be held for investment. So, if someone sells a 4 unit building, they are not required to buy a 4 unit building. They can purchase anything they want, from raw land to a strip mall, as long as it’s being held for investment.
- Is there a timeframe in which I have to complete a 1031 exchange? Yes. From the time the first property is sold, you have 180 days to complete the exchange for another property. The first 45 days of that 180 is known as the Identification period. That is the period where you have to make it known, in writing to the 1031 qualified intermediary, which properties you are considering. All days are included in that 180 days, including weekends and holidays. Always important to follow those dates or else an exchange can be deemed invalid.
- Can I set up a 1031 exchange on a property that already closed? NO. A 1031 exchange must be set up at or prior to the closing.
These are the basics, but always research the exchange company you will be working with. The Federal Government does not regulate 1031 exchange companies.
Tim Wheeler is the Vice-President of Regional Sales for Old Republic Exchange covering the states of IL, WI and MN. He can be reached at 312-515-9241 or at twheeler@oldrepublicexchange.com
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Auricchio Law Offices
Auricchio Law Offices in Chicago provides a complete range of real estate services. We facilitate residential and commercial real estate transactions, advise and represent condominium associations, and represent property owners in real estate litigation. Whatever your real estate issue, we will work diligently to achieve your goals in a timely and efficient manner.
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