Brenda Kellen: What are the rules for a 1031 Exchange? |

Brenda Kellen: What are the rules for a 1031 Exchange?

Brenda Kellen
Grand County Homes and Properties

Investors buy real estate to earn a profit. Decisions are carefully made to determine the effects of location, potential rents and expenses, financing and a multitude of other important factors in an attempt to realize much of a profit as possible. Once the profit is made, the typical investor sells his property, pays his taxes and reinvests in other real estate. The vast majority of real estate investors seldom make use of one of the most valuable techniques for increasing and preserving profit we have available: The tax deferred exchange.

Timeframe: From the time of closing on their relinquished property, the investor has 45 days to nominate potential replacement properties and a total of 180 days from closing to acquire the replacement property.

Set up: The exchange must be set up prior to the closing of the investors relinquished property. The investor cannot have actual or constructive receipt of the funds. The investor or their agent should contact an Exchange Accommodator as soon as possible to begin setting up the exchange and also inform Escrow of their intention to complete a 1031 exchange.

Identification requirements: The investor must ID the replacement property prior to midnight on the 45th day. The investor normally nominates three potential properties of any value. Then, acquires one of these three properties within 180 days. Typically, a common address (unambiguous description) will suffice. It is also a good idea to have a pending offer. If the investor needs to identify more than three properties, then the combined values of all properties cannot exceed 200 percent of the relinquished property’s value.

Values: In order for an investors exchange to be completely tax deferred, the value and equity of the replacement property should be equivalent to or higher than that of the relinquished property. Investors can decrease mortgage levels by bringing cash into the replacement property, but they cannot increase mortgage levels and take cash out of the transaction without a tax implication. If they take cash out or go down in value on their replacement, then they would pay taxes on a portion of the transaction.

Title: It is very important to review how title is held on the investors relinquished and replacement properties and consider potential financing requirements. The vesting needs to be consistent, in order to maintain the IRS continuity of vesting requirement.

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