The Basics of 1031 Exchanges: Part II

Understanding how a 1031 exchange works can make your life a lot easier as an investor. Read on to learn more about some of the key factors you need to know.

Hold Time

While there is no specified hold time outlined in the 1031 code published by the Internal Revenue Service, the IRS will look at whether the property was acquired immediately before an exchange happened. They will want to determine whether it was purchased to fix and flip or whether it was held for productive use or investment. There are many different factors that support this intent to hold for investment but time is one of the most important factors in total. The shorter the time that has elapsed the more substantial other facts should be to support the intent to hold.

Related Party

Related parties are related persons referred to any parties or individuals including entities that have a relationship to the taxpayer as outlined in the internal revenue code. This can include corporations where 50% of the value of the stock is owned directly or indirectly by a particular person, a fiduciary or guarantor of any trust, members of the same family, an S Corporation if the same individual owns more than 50% in value of the outstanding stock of each corporation, an executor of an estate and the beneficiaries of that estate, a fiduciary of one trust and/or a beneficiary of another trust where the same person is the guarantor for each trust. And organization qualified under section 501 of the Internal Revenue Code that is controlled directly or indirectly by a specific individual or by members of the family of such an individual.

You need to consult with an experienced qualified intermediary to determine whether you have relationships linked to your 1031 exchange that could prove problematic. With so many complex relationships at play and the need to carry out your 1031 exchange properly, it is imperative that you know what you are doing and that you are confident with your own decisions. As you can see, there are many different rules that relate to 1031 exchanges. A related party transaction happens when you sell your relinquished property to a related party or you buy a like kind replacement party from someone you are related to. These are permitted provided that you follow specific guidelines and rules associated with the rules established by the internal revenue service. If you sell your old property to a related party, the property has to be held for two years prior to selling or the tax deferred by your 1031 exchange becomes due to the IRS. You can purchase a replacement property from a related party only if they too are also initiating a 1031 exchange. As you can see, this can be extremely complex and having someone at your side to help you can be extremely beneficial. Consult with a qualified intermediary any time you are considering using a 1031 exchange.