1031 Exchange Frequently Asked Questions

What is a 1031 exchange?

The tax deferred exchange, as defined in Section 1031 of the Internal Revenue Code of 1986, as amended, offers investors one of the last great opportunities to build wealth and save taxes. By completing an exchange, the investor (Exchanger) can dispose of their investment property, use all of the equity to acquire replacement investment property, defer the capital gain tax that would ordinarily be paid and leverage all of their equity into a replacement property. Other than the timing requirements for the identification and closing of replacement property, the two major requirements that must be met in order to defer the capital gain tax are: (a) the Exchanger must acquire “like kind” replacement property and (b) the Exchanger cannot receive cash or other benefits (unless the Exchanger pays capital gain taxes on this money).

In any standard 1031 exchange, the Exchanger must enter into the exchange transaction prior to the close of the relinquished property. The Exchanger and the Qualified Intermediary enter into an Exchange Agreement, which essentially requires that (a) the Qualified Intermediary acquires the relinquished property from the Exchanger and transfers it to the buyer by direct deed from the Exchanger and (b) the Qualified Intermediary acquires the replacement property from the seller and transfers it to the Exchanger by direct deed from the seller. The cash or other proceeds from the relinquished property are assigned to the Qualified Intermediary and are held by the Qualified Intermediary in a separate, secure account. The exchange funds are used by the Qualified Intermediary to purchase the replacement property for the Exchanger.


Do I need an Accommodator/Qualified Intermediary?

Yes. IRC Section 1031 states that an independent non related third party has to be in charge of the proceeds and that an assignment of the rights to the property (purchase and sale agreement) has to occur to a non related third party.

If I am already in purchase and sale, is it too late to complete an exchange?

No. We can still complete the exchange but we have to act fast.

Can I keep some of the sales proceeds?

Yes. Any proceeds that you keep however are taxable to you as either capital gains or recapture of depreciation.

What happens to the proceeds of the sale while I am looking for a replacement property?

All your funds are safeguarded and kept in a separate fully insured escrow account located at Union Bank, from which you will receive monthly statements reflecting all activity, including interest earned.

Can I use a family member to be my Accommodator/Qualified Intermediary?

No. The law clearly states that it must be an independent non related individual. You, the taxpayer (seller), your CPA, your agent or agents or anyone who, within a two-year period of the exchange transaction, who has acted as your real estate agent/broker, attorney, accountant/CPA or investment/financial advisor/broker in any capacity cannot be your qualified Intermediary.

What do I need to know about doing an exchange?

Making an exchange part of your sale doesn't add much to the process. You need to attach some additional documents to the purchase and sale agreements and some language to the offer to purchase form. You do need to know about the date requirements. You have 45 days from the date of your relinquished property closing to identify replacement property and 180 days to purchase the identified replacement property. We will generate a date for your on the day you sell your property.

Do I have to purchase what I identify?

Yes, but not every property that you identified. If you do not purchase any of the properties identified within 180 days of selling your property, then the exchange is disallowed.

How do I identify property?

We will give you a form, though you needn't use a form, that you will either mail, fax or hand deliver to us within 45 days of the sale of your property.

Can I take back financing on the property I am selling?

Yes, but it could cause the IRS to assert that you cashed out at that time. We strongly advise you to speak to your accountant or tax advisor.

Can I build on property I already own?

No. The exchange proceeds can only be used to acquire property from someone other than yourself.

Can I purchase a property from a relative?

In most cases it is inadvisable. See your tax professional.

What happens if I cannot find a replacement property?

If you cannot or do not identify any replacement properties before the expiration of the 45 days rule, your exchange has failed and we will give you your proceeds from the sale. You now must however pay taxes on the gain from the sale of the property.

Can I purchase a property to use personally?

The replacement property must be "like-kind. If the property will be used by you and not rented out for a certain period of time, you will have changed the use of the property from business to personal and the exchange will be disallowed.

Can I purchase the property in another name?

You must acquire title to the replacement property as the same entity that sold the relinquished property.

When can I start looking for a replacement property?

You do not have to wait until the sale of your property to start looking, you may start anytime prior to the sale.

Can I purchase an interest in a property?

Yes. You can purchase what is known as a Tenant in Common interest (TIC). These are usually larger properties with professional management in place and have a solid return on investment. You cannot however purchase an interest in a real estate investment trust (REIT).

Can you give me tax advice?

As a Qualified Intermediary, we must remain independent. We can only discuss areas related to your exchange. If we render more advice than that, the exchange could be disallowed because we would not be considered an independent third party.

Can I exchange a property that was my replacement property from a pervious exchange?

Yes, you may continue to postpone the recognition of gain on any property regardless if it was acquired from an earlier exchange. The last property acquired will pass to your heirs at a stepped up basis equal to the current fair market value and your heirs may sell the property for cash at the new basis with out recognition of any of the previous deferred gains.

May I exchange one property for multiple properties?

Yes. One or more relinquished properties, that is property you will sell, may be exchanged for one or more replacement properties, that is property you purchase, subject to certain rules that have time limitations on the identification period of replacement property. The three rules are "Three Property Rule", the "200 Percent Role" and the "95 Percent Rule", it is important that as an exchangor you understand these rules and how each one may effect your exchange.

May I exchange my second or vacation home?

To qualify for a tax-deferred exchange, the property must have been held for investment, or the production of income. Typically your second home will not qualify for this treatment. Have you rented the property out? How have you treated the property on previous year's tax returns? There are specific strategies for converting the use of a property into one appropriate for exchange (Conversion). Again this is where you need the assistance of an experienced Qualified Intermediary to properly assist you.

Can I exchange my vacant land for a condo?

If both are held for investment or for the production of income, you may. You may even, exchange a parking lot for an apartment building. The category of the property will determine if it is qualifying"like-kind" in the eyes of the IRS, and suitable for exchange. The rules are simple all real estate qualifies except property held for resale and personal property.

Is there any special verbiage that belongs in my sales contract pertaining to my 1031 Exchange?

Below is an example of a "Cooperation Clause"

"Buyer hereby acknowledges that it is the intent of the Seller to effect an IRC § 1031 tax deferred exchange which will not delay the closing or cause additional expense to the Buyer. The Seller's rights and obligations under this agreement may be assigned to a Qualified Intermediary, for the purpose of completing such an exchange. Buyer agrees to cooperate with the Seller and Qualified Intermediary to be named, in a manner necessary to complete the exchange."

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