Today we’re going to be talking about 7 Things 1031 exchange You Must Know. This covers about 90% of the things you really need to know the other 10% are just small details.
What is a 1031 exchange
Well, I touched on a little already it is when you sell a property that’s held for investment and want to defer the capital gains.
Not recapture the depreciation you have taken on the property. As long as you follow these rules you’ll be fine.
Real Property Use
Both what you’re selling and what you want to buy. Must be property held for investment.
You cannot use your personal house but, you can do a rental house an office industrial building or a retail building. Investment land also works.
It doesn’t have to be the same type. So you could sell an apartment building and buy a shopping center.
You can sell land held for investment and buy an office building. Whatever the property type it has to be held for investment purposes.
45-day identification period
This is an absolute rule that must be followed and is set in stone.
When you close on the property that you are selling you have to identify a list of replacement properties and submit it to the qualified intermediary within 45 days so your exchange and qualifying.
In the identification rule, you have three types.
1. Identify 3 Replacement Properties
The first one is the most common and that’s where you identify up to three properties nice and simple.
2. 200% Rule
The second way is the 200% rule. That means that all the properties that you identify the value have to be no more than 200% of the property that you are selling.
3. 95% Rule
The third rule which really isn’t used a lot is the 95% rule. That means you can identify as many properties as you want but you have to buy 95% of the ones that you identify.
180-day Exchange Period
The 180-day exchange rule. You only have a hundred and eighty days from the time you sell the property to close on the properties that you have identified to purchase.
That number is also set in stone if it’s the 180th day is on a Saturday or a Sunday or a holiday tough. You’ve got to close before that because you can’t go past there are no exceptions.
Number five qualified intermediary or Qi. You must use a Qi to do the paperwork and hold the money from your sale. You cannot touch or receive the money from your sale or your 1031 is disqualifying.
The Qi according to the IRS must be an unrelated party to the transaction. So your attorney cannot hold the money your accountant cannot hold the money it has to be unrelated.
We use a lot of national companies that have $100,000,000 bonds that cover that money they hold. Some attorneys charge twenty-five hundred to three thousand dollars to do a 1031 exchange.
Some of the national companies that we use are under a thousand dollars. They do everything the paperwork they deal with the title companies.
Very painless and you know it’s going to be done right.
Proper Title Holding
If you and the property in a name like John Smith. The new property has to be titled the same way, John Smith. It cannot be John and Mary Smith.
Now the IRS has opened it up a little bit to where you could do John Smith LLC. Now if the property is already held at an LLC it has to be the same name in the LLC you can’t change it.
If you are selling a billion for $100,000 and have $20,000 in debt. Then we have to buy a property that’s worth at least a hundred thousand dollars and twenty thousand dollars in debt.
Through the magic of real estate leverage, you can take that eighty thousand dollars inequity and buy a two hundred thousand dollar property put a hundred and twenty thousand dollars debt on the property.
Now that’s good leverage what you don’t invest is called boot. So if you want to use seventy thousand dollars of that equity that ten thousand dollars is taxed with all the capital gains and the depreciation recapture.
It’s just easier to reinvest all the proceeds. I hope this information was helpful for you on 1031 exchanges.