{"id":172662,"date":"2024-05-29T15:13:37","date_gmt":"2024-05-29T21:13:37","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=172662"},"modified":"2024-06-27T10:15:31","modified_gmt":"2024-06-27T16:15:31","slug":"1031-exchange-nuances-that-could-ground-your-deal-to-a-halt","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/1031-exchange-nuances-that-could-ground-your-deal-to-a-halt","title":{"rendered":"Watch Out for These 1031 Exchange Nuances That Could Grind Your Deal to a Halt"},"content":{"rendered":"\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">After almost a year of <\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/1031-investor-journal-one\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">personally going through the 1031 exchange<\/span><\/a><span data-preserver-spaces=\"true\"> process, <\/span><span data-preserver-spaces=\"true\">I can say that<\/span><span data-preserver-spaces=\"true\"> I am now an <\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/1031-exchange\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">expert in all things 1031<\/span><\/a><span data-preserver-spaces=\"true\">, and you can trust me.<\/span><span data-preserver-spaces=\"true\">&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Many savvy investors know the main requirements of a successful 1031 exchange, which, when done correctly, allow you to defer substantial <\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/capital-gains-tax\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">capital gains taxes<\/span><\/a><span data-preserver-spaces=\"true\">. But when you <\/span><span data-preserver-spaces=\"true\">actually<\/span><span data-preserver-spaces=\"true\"> dig into the process itself, you <\/span><span data-preserver-spaces=\"true\">start to<\/span><span data-preserver-spaces=\"true\"> realize there\u2019s a lot more under the hood than you may have seen at first blush. Here are some of the oft-overlooked finer points to keep in mind.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">What Most People Know About 1031 Exchanges<\/span><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li><span data-preserver-spaces=\"true\">Your new property needs to be of equal or <\/span><span data-preserver-spaces=\"true\">greater<\/span><span data-preserver-spaces=\"true\"> value than the property you\u2019re selling.<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">You have 45 days to identify a new property.<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">You have 180 days to close on that new property.<\/span><\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">But Wait, There\u2019s More<\/span><\/h2>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Your sale price must include your <\/span><span data-preserver-spaces=\"true\">mortgage<\/span><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">This is the rule that many forget<\/span><span data-preserver-spaces=\"true\">. If you are selling a $500,000 property but still owe $200,000 on your mortgage, you must exchange it for a property that costs at least $500,000, which means you will likely need at least a $200,000 mortgage on the new property too.<\/span><span data-preserver-spaces=\"true\">&nbsp;<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Mind the boot<\/span><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">If you sell your first property for $500,000 and <\/span><span data-preserver-spaces=\"true\">you<\/span><span data-preserver-spaces=\"true\"> buy your exchange property for $400,000, that $100,000 delta is called \u201cthe boot,\u201d and you can expect to pay capital gains on it. Don\u2019t do this. <\/span><span data-preserver-spaces=\"true\">Make sure<\/span><span data-preserver-spaces=\"true\"> your purchased property is the same or <\/span><span data-preserver-spaces=\"true\">greater<\/span><span data-preserver-spaces=\"true\"> value than <\/span><span data-preserver-spaces=\"true\">the one you\u2019re selling<\/span><span data-preserver-spaces=\"true\">.<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Your new property has to be in the U.S.<\/span><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">No exotic C\u00f4te d&#8217;Azur purchase\u2014for this exchange, at least.<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">You must use<\/span><span data-preserver-spaces=\"true\"> a <\/span><span data-preserver-spaces=\"true\">third <\/span><span data-preserver-spaces=\"true\">party<\/span><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">When you sell your first property, <\/span><span data-preserver-spaces=\"true\">all proceeds must be held in <\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/what-is-escrow-and-how-does-it-work\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">escrow<\/span><\/a><span data-preserver-spaces=\"true\"> by the third party<\/span><span data-preserver-spaces=\"true\">.<\/span><span data-preserver-spaces=\"true\"> If you touch them in any way, even for a day, you lose all tax <\/span><span data-preserver-spaces=\"true\">benefit<\/span><span data-preserver-spaces=\"true\">.&nbsp;<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">You can buy multiple <\/span><span data-preserver-spaces=\"true\">properties<\/span><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">You <\/span><span data-preserver-spaces=\"true\">are required to<\/span><span data-preserver-spaces=\"true\"> identify up to three replacement properties in the 45 days after your initial property closes. But there are two exceptions:<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">1. You can <\/span><span data-preserver-spaces=\"true\">actually<\/span><span data-preserver-spaces=\"true\"> identify more than three replacement properties as long as the total value of all your identified properties does not exceed 200% of the sales price of your original property. <\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">2. You can identify as many properties as you like as long as, in the end, you acquire at least 95% of their total value. (Your intermediary helps you legally record your target properties.)<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">When you die, so does your capital gains obligation<\/span><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Yes, the tax gains <\/span><span data-preserver-spaces=\"true\">are technically deferred<\/span><span data-preserver-spaces=\"true\">, but death saves your kids from <\/span><span data-preserver-spaces=\"true\">having to pay<\/span><span data-preserver-spaces=\"true\"> any deferred capital gains tax on your behalf. They inherit the property, and your deferral obligation disappears.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Final Thoughts<\/span><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">When all is said and done, the 1031 is still an excellent way to preserve your hard-won equity and kick the tax can down the road. But make sure you investigate all the rules and understand all the loopholes backward and forwards. One wrong move and you forfeit all your gains!<\/span><\/p>\n\n\n\n    \n  <div id=\"visibility-group-block_d3dcae4a53c59a69d3fa4cb59470358f\" class=\"visibility-group alignwide  hidden\">\n        \n\n<div id=\"hero-block_9088285200760d43b8205f0032b5c32f\" class=\"first:mt-0 hero-block py-4  alignwide   has-background has-slate-200-background-color has-text-color has-theme-gold-color\">\n    <div\n        class=\"gap-10 lg:gap-20 flex flex-wrap lg:flex-nowrap max-w-screen-xl mx-auto px-4 relative lg:items-center \">\n\n        <div class=\"relative z-30 lg:w-1\/2 \">\n            <main class=\"py-4\">\n                \n\n<p class=\"has-slate-800-color has-text-color has-large-font-size wp-block-paragraph\" style=\"font-style:normal;font-weight:800\">Find the Right Agent, Close the Best Deal<\/p>\n\n\n\n<p class=\"my-3 md:my-5 lg:my-8 has-slate-900-color has-text-color wp-block-paragraph\" style=\"font-size:18px\">Step #1: Use Agent Finder to match with top <em><strong>investor-friendly<\/strong><\/em> real estate agents to help you find, analyze, and close your next deal.<\/p>\n\n\n\n<div id=button-custom-event-block_472919a30acdef16cbc08b27bee84455 class='button-custom-event'>\n      <a\n    href=\"https:\/\/www.biggerpockets.com\/agent\/match\"\n        x-on:click=\"window.analytics.track('Blog Block | B2C Marketplace Agent Finder', {\n      referrer: 'https:\/\/www.biggerpockets.com\/blog\/1031-exchange-nuances-that-could-ground-your-deal-to-a-halt',\n    });\"\n    class=\" btn-shape inline-block no-underline has-background has-theme-blue-background-color has-text-color has-white-color\" target=\"_blank\">Find an Agent<\/a>\n  <\/div>\n\n            <\/main>\n        <\/div>\n\n                <div class=\"lg:w-1\/2 first:mt-0 relative h-full lg:flex lg:items-center\">\n            <img decoding=\"async\" class=\"object-cover w-full relative z-20 my-0  rounded-md hidden lg:block\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/08\/Marketplace-Blog-Blocks-Agent-v3.png\" alt=\"investor friendly real estate agent\" title=\"\">\n        <\/div>\n            <\/div>\n<\/div>\n\n  <\/div>\n  \n\n\n<div class=\"wp-block-group\"><div class=\"wp-block-group__inner-container is-layout-constrained wp-block-group-is-layout-constrained\">\n    \n  <div id=\"visibility-group-block_64dd31c79f00f\" class=\"visibility-group  \">\n        \n\n<div style=\"height:10px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<div id=\"hero-block_64dd2875dba9d\" class=\"first:mt-0 hero-block py-4    has-background has-slate-100-background-color has-text-color has-theme-slate-color\">\n    <div\n        class=\" flex flex-wrap lg:flex-nowrap max-w-screen-xl mx-auto px-4 relative lg:items-center \">\n\n        <div class=\"relative z-30 w-full \">\n            <main class=\"py-4\">\n                \n\n<h3 class=\"wp-block-heading my-0 tracking-tight font-extrabold has-theme-slate-dark-color has-text-color has-large-font-size\">Join the community<\/h3>\n\n\n\n<p class=\"my-3 md:my-5 lg:my-8 has-theme-slate-color has-text-color wp-block-paragraph\" style=\"font-size:16px;font-style:normal;font-weight:400\">Ready to succeed in real estate investing? Create a free BiggerPockets account to learn about investment strategies; ask questions and get answers from our community of +2 million members; connect with investor-friendly agents; and so much more. <\/p>\n\n\n\n<div id=button-custom-event-block_64dd2888dba9e class='button-custom-event'>\n      <a\n    href=\"https:\/\/www.biggerpockets.com\/signup\"\n        x-on:click=\"window.analytics.track('Blog Block | Acquisition | Free Membership Signup', {\n      referrer: 'https:\/\/www.biggerpockets.com\/blog\/1031-exchange-nuances-that-could-ground-your-deal-to-a-halt',\n    });\"\n    class=\" btn-shape inline-block no-underline has-background has-theme-blue-background-color has-text-color has-white-color\" target=\"_blank\">Sign Up<\/a>\n  <\/div>\n\n            <\/main>\n        <\/div>\n\n            <\/div>\n<\/div>\n\n\n<div style=\"height:10px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n  <\/div>\n  <\/div><\/div>\n","protected":false},"excerpt":{"rendered":"<p>After almost a year of personally going through the 1031 exchange process, I can say that I am now an expert in all things 1031, and you can trust me.&nbsp; [&hellip;]<\/p>\n","protected":false},"author":613680,"featured_media":172658,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[7359],"tags":[],"class_list":["post-172662","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-1031-exchanges"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/172662","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/613680"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=172662"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/172662\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/172658"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=172662"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=172662"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=172662"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}