1031 Exchange (IRC 1031)
The term 1031 Exchange refers to a transaction, stipulated in the Internal Revenue Code 1031 that, when specific rules and time constraints are followed, allows an investment property to be sold and and the proceeds be reinvested in a new property in order to defer taxes on the capital gains, from the sale of the original property, until a later date.
1031 Exchange Property
Also known as a 1031 replacement property, a 1031 Exchange Property refers to the property that is replacing the property that has been sold by an investor.
1031 Exchange Timeline
A 1031 Exchange transaction must be fully completed within 180 days of the initial investment property being sold. First the investor desiring a 1031 Exchange must identify potential replacement properties within the first 45 days with the exchange being completed in 180 days, not 45 days plus 180 days. Estimate your own timeline.
The 200% Rule allows the investor to identify an unlimited number of replacement properties, provided the combined total value of these properties does not exceed 200% of the value of the property being relinquished.
The 95% rule also allows real estate investors to identify an unlimited number of replacement properties for the property being relinquished. But unlike the 200% rule that puts a limit on the total value of the identified replacement properties, the 95% rule requires the investor to actually purchase 95% of the aggregate value of the replacement properties identified.
See Qualified Intermediary (QI)
The type of real estate. Common asset classes are residential, commercial, land, and special use.
When the value of the Replacement Property is less than the value of the Relinquished Property, the difference in value between the two is called “boot”. Any boot that an investor receives when conducting a 1031 exchange is subject to capital gains tax that cannot be deferred as part of their 1031 transaction.
Improvements made to a ‘shell’ space. Examples of ‘building out’ a space include erecting interior walls and doors and running electrical wiring.
Capital Gain or Loss
Difference between the acquisition price and the sales price. If a property is sold for more than paid, a capital gain results. If a property is sold for less than originally paid, a capital loss.