1031 Tax Deferred Exchange Services in La Jolla, CA
Like-kind refers to the type of property being exchanged. You can exchange any investment real estate for any other type of investment real estate – for example, vacant land can be exchanged for rental property. In most cases your personal residence is not a like-kind investment property. In addition, you can often exchange one property into multiple properties. The three-property rule allows for an exchange into three separate properties which can provide for diversification of your capital.
To accomplish a fully tax-deferred exchange the rule of thumb is exchange even or up in value and exchange even or up in equity and in debt.
To the extent that you do not exchange even or up in value and/or exchange even or up in equity and debt, you will have received non-qualifying property (“boot”) in your exchange. If boot is received, tax is computed on the amount of gain on the sale or the amount of boot received – whichever is lower.
Typical Exchange Addendum Language for Sales Contracts
“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 expenses to the Buyer. The Seller’s rights under this agreement may be assigned to a Qualified Intermediary, named by Seller, for the purpose of completing such an exchange. Buyer agrees to cooperate with the Seller and the Qualified Intermediary in a manner necessary to complete the Exchange.”
1031 Do’s and Don’ts
DO advanced planning for the exchange. Talk to your accountant, attorney, broker, financial planner, lender and Qualified Intermediary prior to exchanging and possibly investing in a Delaware Statutory Trust (DST).
DO NOT miss your identification and exchange deadlines. Failure to identify within the 45 day identification period or failure to acquire replacement property within the 180 day exchange period will disqualify the entire exchange resulting in the sale of the downleg property being fully taxable. Reputable Intermediaries will not act on back- dated or late identifications.
DO keep in mind these three basic rules to qualify for complete tax deferral:
- Receive only “like-kind” replacement property.
- Use all proceeds from the relinquished property for purchasing the replacement property.
- Make sure the debt on the replacement property is equal to or greater than the debt on the relinquished property. (Exception: A reduction in debt can be offset with additional cash; however, a reduction in equity cannot be offset by increasing debt).
DO NOT try doing a §1031 exchange using your attorney or CPA to hold title or funds. IRS regulation requires a Qualified Intermediary to properly complete an exchange. Call us for the name of one that operates in your area.
DO attempt to sell before you purchase. Occasionally exchangers find the ideal replacement property before a buyer is found for the relinquished property. If this situation occurs, a “reverse” exchange (buying before selling) may be necessary.
DO NOT dissolve partnerships or change the manner of holding title during the exchange. A change in the Exchanger’s legal relationship with the property may jeopardize the exchange.
**This webpage is not associated with any specifc offering, and the properties pictured are not associated with any current offering.
Schedule a Complimentary Consultation
Want to learn more about 1031 exchanges or Delaware Statutory Trusts (DSTs)? Schedule your complimentary consultation with Investment Professional Don Meredith, founder of Tactical Income, Inc in San Diego. Don has been working with real estate investors for over 20 years and specializes in 1031 Tax Deferred Exchanges and Delaware Statutory Trusts.