1031 Exchange Replacement Property FAQ
What are the time requirements in an exchange?
From the time of closing on the relinquished property, the investor has 45 days to nominate potential replacement properties and a total of 180 days to acquire the 1031 exchange replacement property.
What are the guidelines for identifying 1031 exchange replacement properties?
The Exchanger is required to provide an “unambiguous description” of the potential replacement property on or before the 45th day after closing on the relinquished property. A legal description or physical address will suffice. The following guidelines must be followed if the Exchanger wishes to identify or purchase multiple properties:
1) Identify up to 3 properties of any value with the intent of purchasing at least one.
2) Identify more than 3 properties with an aggregate value that does not exceed 200% of the market value of the relinquished property.
3) Identify more than 3 properties with an aggregate value exceeding 200% of the relinquished property, knowing that 95% of the market value of all properties identified must be acquired.
What does not qualify as a 1031 exchange replacement property?
The tax code specifically excludes some property even if the property is used in trade or business or for investment. These excluded properties generally involve stocks, bonds, notes, securities, and interest in partnerships. Property held “primarily for sale” is also excluded. This means property purchased with the intent to sell, such as a remodel flip, or vacant land to be developed into residential use. A primary residence usually does not qualify for an exchange because it is not used in trade or business as an investment.
Can I go down in value and reduce the amount of debt I have in a property?
You may proceed with an exchange even if you take some money out to use any way you like. However, you will be liable for paying the capital gains tax on the difference (“boot”).
Can I make an offer on a replacement property and sign a contract before my relinquished property is sold?
If you find a 1031 exchange replacement property before your relinquished property is sold, you may get that property under contract prior to the closing of your relinquished property. As long as the closing of the replacement property occurs after the closing of the relinquished property, no matter how short that period of time may be, the exchange works.
How long does a property need to be held before qualifying for an exchange?
The tax code does not provide a specific time period for holding investment property. Timing is less important than the investor’s intent to hold the property for investment at the time of acquiring the property.
Learn the basics of a 1031 like kind exchange and read about the exchange rules and process. If you have questions about investing in commercial real estate or would like assistance in locating a 1031 exchange replacement property, contact HighStreet Net Lease Group.
