1031 Exchange - Explained

7 Replies

Hello All!

Quick question, I was explaining the 1031 Exchange to one of my friends and he had some questions for me that I couldn't answer. Please help!

Is there a specific amount of time that one must own/hold a property before being able to use a 1031 exchange?

Are there different rules applied in each state?

How long after selling a property do you have to reinvest it with the 1031 exchange?

Thank you for your help!

- 1st question: No but when you file you have to prove that the property was used solely for investing purposes (ex- you rented it out) if you lived there for any amount of time, I believe it disqualifies you. 

2nd question- I am not sure

- 3rd question After selling your 1031 exchange you have about 6-9 months (preferably 6 months I am in California). 

I hope this helps and if I am wrong, please someone correct me. I just learned a bit about 1031 exchanges last week. 

Goodluck!

@Jason Foxx

Question 2: 1031 is a federal law, however a couple of states will tax the gains if you complete the exchange through purchase in another state. For example, a seller owns in Pennslyvania, and exchanges for a property in Florida; they would owe gains tax in PA.

Question 3: replacement property must be identified by day 45, and possession taken by day 180 (sale date being day 0).

#1 You have 45 days to ID properties for your trade.  Several rules exist when you get to day 45.  The 3 property rule, the 200% rule, and the 95% rule.  You have a total of 180 days from close of original sale to complete your 1031.

#2 I know Pennsylvania does not honor the 1031 on any PA transactions.  So if you sell in Pittsburgh and buy in Philly, you will pay PA cap gains taxes.  PA also has an onerous transfer tax.  I have seen as high as 4% of transaction amount. 

#3 Will be determined by intent. If you close on an exchange and you receive an unsolicited offer, you can probably sell. Of course, if you do a lot of exchanges, and have unsolicited offers on all of them, it would appear that something is up.

Mark

@Jason Foxx , Some good info here.  I'll reach out via pm to put some resources in your hands.  As @Kyle Kadish and @Mark Creason said 1031 is a federal statute that you can do in any state to defer federal tax and depreciation recapture. As of now all states except PA also allow you to do the same with State capital gains tax as well. That's a moving landscape so you have to look at the nuances of state to state. But federal - anywhere.

And like they both said, you have 45 days to identify and a total of 180 days to complete the purchase or purchases. 

@Armando Castillo , You're right that there is no statutory holding period and that your intent must have been to hold the property for investment.  But actual income production is not a statutory requirement.  And you absolutely can use the property some for personal use.  Thousands and thousands of vacation rentals are handled with 1031 exchanges every year.

@Jason Foxx

While there is no hard and fast rule about how long you need to hold a property to be eligible for a 1031, most folks agree you're safe with 12-18 months as long as you can prove the stated intent was to hold long-term. Again, as @Mark Creason said, you can get away with exchanging a prop you've held for a short period of time (again, intent must be proven, ie not forum posts about flipping it) but if you have 'unsolicited offers' all the time, the IRS will get wise.

If the property is a vacation home rather than a regular rental prop, there are some stricter rules. You have to hold it for at least 24 months prior to the exchange, must have lived there no more than 14 days out of each year (and less than 10% of the total time it was rented out; ie. if you only rented it out for 30 days of the year, you could only live there for 3 days that year), AND must have rented it to someone else for at least 14 days each year . 

One thing to be clear on, however, is that you MUST have a qualified intermediary in place before you close on the sale of your current property. If one penny of those proceeds touches your bank account, the exchange is void.