Question 1

What is a 1031 exchange?

Accepted Answer

"Section 1031 of the IRS tax code allows you to defer taxes on capital gains from the sale of investment properties if all the proceeds are promptly invested in replacement properties. Basically, you’re deferring the taxes until you sell the new property."

Question 2

What types of real estate qualify for 1031 exchanges? Can I do a 1031 exchange on my vacation home or rental property?

Accepted Answer

"Vacant or raw land that’s held for investment purposes qualifies for a 1031 exchange. Properties you’re renting out qualify, but a primary residence or vacation home doesn’t."

Question 3

When do I have to decide about making an exchange?

Accepted Answer

"You have to decide to engage in an exchange before you sell the relinquished property. If you sell the property before deciding to do an exchange, you can’t defer the capital gains by investing in the new property—the transaction has been completed and you’ve acquired the tax liability."

Question 4

When is the 1031 exchange completed?

Accepted Answer

"It’s complete when you close on the replacement property."

Question 5

Do I need to have a mortgage on the replacement property?

Accepted Answer

"No. The rule is, after paying off the mortgage, all the net proceeds from the sale must go into the replacement property. That means the new property must be of equal or greater value than the relinquished property. If you have the cash to pay the difference, you don’t need to have a mortgage on the replacement property."

Question 6

Can the proceeds from the sale of a relinquished property be held in escrow?

Accepted Answer

"Yes. We warehouse the proceeds from the sale in client accounts and apply them to the purchase of a replacement property."

Question 7

Is there a limit to how long the proceeds can remain in escrow?

Accepted Answer

"Yes. There are two deadlines, one at 45 days and another at 180 days. Starting from the day of the sale, you have up to 45 calendar days to identify one or more replacement properties. You have to close on one of the identified properties within 180 calendar days. If you miss either of these deadlines, you incur the capital gains tax liability from the sale. The deadlines are pretty much set in stone and can only be waived in cases where a natural disaster affects the property. Personal emergencies don’t count."

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