What is a 1031 exchange?

The basic idea

Instead of selling a property and recognizing gain immediately, an investor may exchange it for other qualifying real property. When the requirements are satisfied, the gain is generally deferred rather than eliminated; the deferred gain typically carries into the basis of the replacement property.

Personal residences and property held primarily for resale generally do not qualify. Since the 2017 tax law changes, section 1031 applies to real property only.

The two deadlines everyone talks about

Both periods begin on the date the relinquished property transfers, and both are counted in calendar days — they are not extended for weekends or holidays.

• ·45 days to identify potential replacement property in writing.
• ·180 days to complete the acquisition — or the due date of the tax return for the year of transfer, whichever comes first.

Why a Qualified Intermediary matters

In a typical deferred exchange, the taxpayer must not receive or control the sale proceeds. A Qualified Intermediary holds the funds and facilitates the exchange under a written agreement. Taking the money directly can spoil the exchange.

FortyFive is not a Qualified Intermediary and never holds exchange funds. We help you find and evaluate replacement property inside your timeline.

Where investors get tripped up

The most common problems are structural or procedural, not mathematical.

• ·Missing the 45-day identification window, or identifying informally rather than in writing.
• ·Receiving cash or debt relief that is not reinvested, creating taxable boot.
• ·Buying less value than was sold, leaving a shortfall.
• ·Starting the search after closing, with the clock already running.

Frequently asked

Does a 1031 exchange eliminate tax?

Generally it defers recognition rather than eliminating it. Deferred gain usually carries forward into the replacement property's basis.

Can I exchange into multiple properties?

Identification frameworks such as the three-property rule and the 200% rule address how many properties may be identified and at what aggregate value. Confirm application with your tax professional.

When should I start looking?

Before closing, whenever possible. Most investors who miss deadlines started searching after the sale had already closed.