While many experienced real estate investors are familiar with the 1031 process of avoiding capital gains tax, they may not be fully aware of their options.
Generally, there are 4 different types of 1031 exchanges:
- The most common, Delayed Exchange: current property is sold, and then a replacement property is purchased within the allowed time.
- The most difficult, Simultaneous Exchange: current property is sold at the same time a replacement property is purchased.
- The most controlled, Reverse Exchange: the replacement property is purchased before the current property is sold. You have 45 days to identify current property (which you already know) and 180 days to close (find buyer prior and execute PSA after replacement property is purchased).
- The most flexible, Build to Suit Exchange: current property is sold and a replacement property is identified at a lower price than property sold. Investor can use the remaining exchange proceeds to improve the property, so replacement property is at least equal to property being sold.
- You can only identify up to 3 properties. False, you can identify unlimited properties as long as the total price of all identified properties do not exceed 200% of the current property’s value. This is used when the exchanger considers purchasing two or more properties equal to the value of the current property.
- Partial exchange is not possible. False, you can purchase a replacement property lower in value, so you can pocket some of the money. But you will have to pay tax on the difference.
- 45 days to identify, then an additional 180 days to close. False, the two time periods happen simultaneously. Identification and close must happen within 180 calendar days total.
- A vacation or second home does not qualify under 1031. False, IRS will allow as long as the property is owned for 2 years, rented at fair market value for 14 days each year and personal use is restricted to 14 days each year.
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