A 1031 exchange is a unique investment option for investors seeking tax-deferral benefits. The IRS lets you defer up to 100% capital gains tax if you reinvest the sale proceeds into like-kind property. It is a way through which you can exchange any investment property for another. Unfortunately, private properties like land or primary residence don’t qualify for 1031 exchanges. You can only swap income-producing properties with one another using a 1031 exchange. To successfully complete your exchange, you must hire a Qualified Intermediary.
Known as a facilitator, a qualified intermediary is an active participant in your 1031 exchange.
A Qualified Intermediary is an individual responsible who facilitates 1031 exchanges. From doing all due diligence to closing your 1031 exchange, everything is done by your QI. The involvement of a Qualified Intermediary is kept mandatory in 1031 exchanges so that investors don’t face any difficulty in locating replacement properties. Qualified Intermediaries generally have ample resources using which they can locate any kind of property within no time. Due to all these reasons, the participation of a Qualified Intermediary in 1031 exchanges is vital for you and your exchange.
Apart from choosing an experienced Qualified Intermediary, another thing that you should select wisely is your 1031 exchange. As there are different 1031 exchange options available, you must choose the one that suits you the most.
- Simultaneous Exchange – A simultaneous exchange allows you to sell your current property and acquire a new asset at the same time. If you are doing a simultaneous 1031 exchange, you must complete the transaction in one day.
- Delayed/Forward Exchange – A delayed exchange is a typical 1031 exchange where you sell your property first and then acquire the replacement property. Upon successfully closing on the sale of the relinquished property, you get a time limit of 45 days for identifying the potential replacement property. Investors doing a delayed exchange must complete their respective exchange within 180 days, which begins the day the relinquished property is sold.
- Reverse Exchange – A reverse exchange is just the opposite of a delayed exchange. Here you acquire the replacement property first and then close on the sale of your current property. Under no circumstances you can hold the title of both properties (relinquished and replacement) at the same time.
- Built-to-suit or Improved Exchange – A built-to-suit exchange, also known as an Improved Exchange, allows you to withdraw a portion of your 1031 proceeds and invest it in the replacement property for carrying out some minor repairing or improvement work.
All these different forms of 1031 exchanges provide flexibility to investors. Though every 1031 exchange offers the same benefits, the process for executing each exchange is entirely different. Therefore, you must choose the 1031 exchange that you think will be more suitable for you.
You can identify any number of real estate as your 1031 exchange replacement properties.
Most often than not, investors are confused about the number of properties they can acquire as replacement properties. Here are the three property rules that you can use –
- Three-Property Rule – As per this rule, you can identify up to three replacement properties irrespective of their values. Plus, you don’t need to acquire all the three identified properties, and it totally depends upon you whether you want to purchase one, two, or all three properties.
- The 200% Rule – This rule lets you identify any number of replacement properties as long as the current market value of all the identified properties doesn’t exceed 200% of the current market value of the relinquished property (the property you sold).
- The 95% Rule – Use this rule to identify any number of replacement properties as long as the market value of the property acquired at the end of the exchange is at least 95% of the market value of all the identified properties.
Getting access to high-performing investment properties can be challenging for some investors. You can end up searching for ‘1031 properties for sale‘ on the internet and yet not find any. It’s better to consult a 1031 expert or a real estate firm that facilitates 1031 exchanges. You can also find premium off-market 1031 exchange replacement properties in the property section of our website.