Those who are new to real estate may not have any idea what a 1031 exchange entails. In general, a 1031 exchange is when a property can be used in a trade for another. There are rules and guidelines for this form of investment which one of our specialists can explain to you along with the benefits. Below are answers to some of the most common questions that people have about 1031 exchanges when they are considering this form of investment.
What is a “like-kind” exchange?
The term “like-kind” refers to the essence of a 1031 exchange transaction. A property can be used in a trade and replaced with a like-kind property. This can be easily confused as people may interpret this as meaning a person must trade their family home for another family home. However, the concept of “like-kind” is more broad than that. A person can actually trade in their family home for an apartment, condo, open land, office, or something else.
What is someone not able to include during a 1031 exchange property trade?
A person is not able to swap property with stocks, certificates of trust, partnership shares, bonds, or notes. Also, a person may not exchange their property for a personal home, property not within the country, or a stock-in-trade. If a property investor wishes to buy a place that needs renovations and wants to sell once improvements are done, it cannot be exchanged. However, this property can be used for a stock-in-trade instead.
Are there time requirements when it comes to a 1031 exchange?
Yes, an investor must choose new potential properties within 45 days after the relinquished property has closed. Another time requirement includes the investor having to close the deal on the new property within 180 days after closing date of the relinquished property. The investor can choose three potential new properties and must seal the deal on one within the 180 day time limit.
Are there any replacement property rules?
An investor who wants to complete a 1031 exchange and designates more than a single property as the potential replacement must follow these rules:
- The investor can designate more than three replacement properties, but the total value must not surpass 200% of the traded property market value.
- The investor can designate more than three replacement properties with a total value that surpasses 200% of the traded property. However, only with the understanding that 95% of the market value for these properties must be acquired.
- The investor can designate three replacement properties of any value, but must have a serious intention to close the deal on at least one of them.
What is the role of a 1031 exchange qualified intermediary?
During the 1031 exchange process, it can be helpful for an investor to contact an exchange facilitation company such as Calkain about working with a qualified intermediary. At Avison Young, our team of professionals can help you with a 1031 exchange transaction. Call us today to learn more about how a 1031 exchange may benefit your investment portfolio.What is a 1031 Exchange?