| The following general terms and frequently asked questions provide only basic information and do not represent tax, legal or financial advice. Marsteller Realty strongly recommends that you consult with your tax and/or legal advisor when contemplating an exchange and regarding your specific situation. |
| General Questions |
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Q: What is a 1031 Exchange?
A: IRC Code 1031 (a) (1) states: "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."
Essentially, a properly structured exchange allows a property owner to sell their investment, rental, business or vacation real estate, and reinvest the net proceeds in other real estate and defer the capital gains tax.
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Q: What is like-kind property?
A: IRC 1031 requires the exchange of a like-kind relinquished property for a like-kind replacement property. Real estate is considered like-kind when held for investment purposes or for productive use in a trade or business. This definition of like-kind allows for flexibility as exchanged properties do not have to be of the same type. For example, unimproved property can be exchanged with improved real property and vice versa.
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Q: What are the requirements of a 1031 Exchange?
A: The seller must dispose of property held for productive use in a trade or business or for investment. The seller must acquire other property held for productive use in a trade or business or for investment of equal or greater value than the value (sale price) and existing debt of the property being sold, and all of the equity from the property being sold must go into acquiring the replacement property.
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Q: How much time do I have?
A: The seller has 45 days from the day of closing on the relinquished property (initial sale) to properly identify up to three candidate properties you wish to acquire; this is known as the Identification Period. The seller has up to 180 days from the transfer to acquire one or all of your identified properties as your replacement property purchase. This is known as the Exchange Period.
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Q: I want to complete a 1031 Exchange, but my co-owner wants to cash out and take his money; is that allowed?
A: Yes, however, your co-owner’s portion will be subjected to the tax on any profit/gain.
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Q: Can I exchange my property for a property in another state?
A: Yes, anywhere in the United States.
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Q: Can I trade out several smaller properties for a larger one?
A: Yes, as long as the value of the properties are equal.
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