1031 Exchanges get their name from Section 1031 of the IRS Code. Otherwise known as a tax-deferred exchange, this allows investors to swap an investment or business property for like-kind property of equal or greater value while deferring capital gains taxes. If your property meets the requirements, you can exchange it for another investment or property and have limited or no tax due at the time of the swap.
Discover what properties qualify for a 1031 exchange as well as a list of 1031 benefits and timelines below.
What Properties Qualify for a 1031 Exchange?
The IRS defines the following qualifications for a 1031 exchange and what “like-kind” properties mean:
Both properties must be held for use in a trade or business or for investment. Property used primarily for personal use, like a primary residence or a second home or vacation home, does not qualify for like-kind exchange treatment.
Both properties must be similar enough to qualify as "like-kind." Like-kind property is property of the same nature, character or class. Quality or grade does not matter. Most real estate will be like-kind to other real estate. For example, real property that is improved with a residential rental house is like-kind to vacant land. One exception for real estate is that property within the United States is not like-kind to property outside of the United States. Also, improvements that are conveyed without land are not of like kind to land.
The following types of properties are excluded from Section 1031:
Inventory or stock in trade
Stocks, bonds, or notes
Other securities or debt
Partnership interests
Certificates of trust
Benefits of a 1031 Exchange
Tax Deferral
This is one of the key benefits of doing a 1031 exchange. Because you do not have to pay capital gains tax at the time of the exchange, you will have more capital to reinvest in the replacement property.
Increased Purchasing Power
Similar to tax deferral, the increased cash flow allows you to obtain one or more properties with higher yield, compared to buying and selling a new property and paying the applicable taxes.
Wealth Accumulation
You could leverage 1031 exchanges to grow your portfolio relatively quickly, and thus increase your cash flow and net worth as you diversify. You could build wealth over the long-term and potentially pass on those investments to your heirs.
1031 Timelines to Know
Identification 45 Day Rule
The Identification Period begins on the date the Relinquished Property closes escrow and ends at midnight on the 45th day thereafter. The Replacement Property must be identified in a signed writing, unambiguously describing the property, and must be delivered to a party
to the exchange. Identification may be made pursuant to the 3 Property Rule or the 200% rule.
The 3 Property Rule
The 3 Property Rule allows for identification of up to three U.S. properties, without regard to fair market value of the properties.
The 200% Rule
The 200% Rule allows for identification of four or more properties as long as the combined value of all properties identified does not exceed 200% of the fair market value of the Relinquished Property.
Want to Explore Your Options?
With many moving parts, 1031 exchanges can be a complex process, but it doesn’t have to be complicated. As your qualified intermediary, Growth 1031 is experienced and fully equipped to facilitate your 1031 exchanges. We walk you through all stages of the exchange and guide you through every step. Per California law, our Exchange Accommodators are also licensed and bonded for your peace of mind. Whether you want to learn more about 1031 exchanges or are ready to get into the exchange process, we’d love to hear from you! Contact Growth 1031 for a consultation today.
Disclaimer: Growth 1031, Inc. is a qualified intermediary that specializes in facilitating 1031 exchanges. Growth 1031, Inc.is not a law-firm and does not provide tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.