Apex1031 | FAQs

Here’s some of our FAQs

We list lots of questions and answers below. But if you have questions about your specific 1031 exchange situation, please schedule a consultation and we will be glad to help you.

Why is an accommodator needed?

IRS regulations are very clear that the taxpayer may not receive the proceeds or take constructive receipt of the funds in any way, without disqualifying the exchange.

What is a qualified intermediary?

That’s what we are. The IRS says if you touch the money you must pay the tax. However, if you use a qualified intermediary to transfer the money from the sold property into the purchased property, you qualify for a tax-free exchange. The IRS does not permit your accountant, attorney, or escrow company to be your qualified intermediary. Click Here to View our Bond

How can I qualify to pay NO taxes when I sell my property?

As long as your property has been used for investment, you can qualify! Section 1031 of the IRS code lets you sell your property and buy a new property without paying any taxes if you simply follow the specific rules. That’s where we come in to help. As a professional qualified intermediary, we’ll help you qualify and gain the advantages of a 1031 tax-free exchange.

Can I get legal advice from you?

No, the IRS does not allow us to act as both your qualified intermediary and your attorney or tax advisor. We will work closely with your attorney and CPA to make sure your tax-free exchange goes smoothly.

Can I finance the sale of my property (seller carry back note)?

Yes. However, to have a full tax-deferred exchange all notes must be paid by the buyer and the acquired property must close within the 180 day period. If the notes are not paid within 180 days then the portion of the exchange proceeds in the 1031 Exchange can be exchanged for like-kind property and the funds from the note are classified as an installment sale and are taxable when received. Example 1: Relinquished property sells for $500,000.00. The buyer pays $200,000.00 cash and the seller gives a $300,000.00 carry back note with a term of 3 months. The $200,000.00 is placed in the 1031 Exchange account and the $300,000.00 note is made payable to the Exchange Accommodator. When the 3-month term is up the buyer pays the $300,000.00 to the Exchange Accommodator and the taxpayer (seller) buys replacement property for $500,000.00. This is a fully deferred exchange. Example 2: Relinquished property sells for $500,000.00. The buyer pays $200,000.00 cash and the seller gives a $300,000.00 carry back note with a term of 3 years. The $200,000.00 is placed in the 1031 Exchange account and the $300,000.00 note is made payable to the Seller. The seller then buys replacement property for $200,000.00 and receives payment on the note in installments. This is a partial exchange and the note installment proceeds are taxable when received.

Do I have to spend everything in my 1031 account?

No, you do not have to spend all of your funds. However, any amount not spent will be considered cash boot and will be subject to capital gains taxes and any applicable recaptured depreciation. For example, the Relinquished (sold) property is sold for $500,000.00. The Acquired (bought) property is bought for $400,000.00. The $100,000.00 would be considered cash boot and would be taxable.

Can I avoid paying taxes forever?

Yes, you can. By simply following the 1031 exchange rules every time you sell an investment property, your estate escapes all the capital gains taxes forever after you pass away!

What exactly are the tax advantages in exchanging?

You can eliminate paying any capital gains taxes, and you can eliminate paying the even higher-rate taxes on the recapture of depreciation you’ve taken on your property. By exchanging into a higher priced property you’ll also gain additional depreciation deductions which can increase your after-tax income.

Are there reasons to exchange rather than tax advantages?

Yes, there are many non-tax reasons to exchange. For example, if you no longer like managing property, you can exchange your management-intensive property for triple-net management free property, or exchange multiple smaller properties for one that can be professionally managed. Or, if your current property cannot be easily refinanced, you could exchange out of that property for a new property which could be refinanced more easily. In this case, you can take some cash out or maybe exchange to improve cash flow.

What kind of real estate qualifies for a 1031 exchange?

Almost every kind of real estate is considered “like kind” and can be exchanged for any other real estate, including vacant land for apartments, a rental house for a shopping center, an office building for a leasehold interest with 30 years or more remaining, as long as you hold them for investment or business use. Check with us on the specific properties.

Can I buy a new property before selling my old one?

Yes, you can buy a new property before selling the old property and still qualify. This is called a “reverse” exchange. The qualified intermediary takes title to the new property you buy and holds it for you until you sell your old property.

Identification Rules

The IRS states that identification must be in writing, signed by you, and delivered to a person involved in the exchange like the qualified intermediary. A valid identification will have the replacement properties clearly described. In the case of real estate, this means the legal description, street address, or distinguishable name and proposed purchase price.

If you cannot purchase property that you have identified and the taxpayer is within the 45 day identification period, correction or substitutions may be made to the identification. If the taxpayer has identified property and has passed the 45 day identification period, other property cannot be substituted.

Please call us at 866-944-1031 for more details.

Exchange Timelines

There is no holding period if you want to exchange the property. You can exchange the day after you buy a property. Remember you don’t want to be considered a dealer or speculator so be certain not to have a contract on the record to SELL before you have actually closed on the property you are BUYING..but you can enter a contract to sell right after you buy.

There are no actual holding rules given by the IRS. Many tax advisors advise that the property be held at least 12 months prior to the exchange. The amount of time the property is held is not the only thing the IRS looks at when determining the validity of a 1031 Exchange. Another important factor is the intent to hold the property for business or investment use.

Property(ies) to be acquired must be identified and delivered by midnight of the 45th day following the date of close of the relinquished property. All replacement property(ies) must close escrow by midnight of the 180th day following the date of close of the relinquished property. For the most part, the 45 day and 180 day limits cannot be extended. However, the IRS has issued extensions to areas affected by natural disasters. Your accommodator will have the latest information regarding limit extensions. An example of an extension issued by the IRS is here.

The exchange must be completed by the tax filing date of April 15th unless a taxpayer files for an extension to file federal and state tax returns. Once the extensions of time have been filed, you must complete your 1031 exchange transaction within the 180 days before you actually file your Federal and state income tax returns.

Related Party

A related party is but is not limited to, immediate family members, such as brothers, sisters, spouses, ancestors, and lineal descendants. A corporation, limited liability company, or partnership in which more than 50% of the stock, membership interests, or partnership interests, or more than 50% of the capital interest or profits interest owned by the taxpayer is also considered to be a related party. The executor of an estate and the beneficiary of the estate in a trust are also considered related parties. A taxpayer can SELL a property to a related party and acquire like-kind replacement property from a non-related party without violating 1031 rules, however, both parties must hold the respective properties for a minimum of 2 years to qualify.

The IRS has offered several private letter rulings which may dispose of the 2 year holding period for the related buyer. Click to view a selected private letter ruling: PLR200709036, PLR200712013, PLR2007280108. A taxpayer cannot SELL to a related party and BUY property from a related party unless both parties are completing their own 1031 Exchange or can prove that the transaction was not completed to avoid taxes. A taxpayer cannot sell to an unrelated party and buy from a related party. The IRS has issued Revenue Ruling 2002-83 which describes its position on related party exchanges. Click here for the document.

Explanations

The 3 Property Rule limits the total (aggregate) number of like-kind replacement properties that you can identify to three (3) potential like-kind replacement properties. The vast majority of Investors today use this three (3) property identification rule.

The 200% of Fair Market Value Identification Rule means that you can identify more than three (3) like-kind replacement properties as long as the total (aggregate) fair market value of all the identified like-kind replacement properties does not exceed 200% of the total (aggregate) net sales value of your relinquished property(ies) sold in your 1031 exchange. The limitation is only on the total (aggregate) identified value. There is no limitation on the total number of like-kind replacement properties.For example, if you sold relinquished property(ies) in the amount of $2,000,000 you would be able to identify as many like-kind replacement properties as you want as long as the total (aggregate) value of the identified like-kind replacement properties does not exceed $4,000,000 (200% of $2,000,000).

Lastly, the 95% Identification Exception is an exceptionally useful tool under the right circumstances but can present some tricky problems. You may need to identify significantly more like-kind replacement properties than the first two identification rules permit. There is no limit as to the total (aggregate) number or value of identified like-kind replacement properties permitted under the 95% exception as long as you actually acquire and close on 95% of the value identified. However, if you do not acquire and close on at least 95% of the value of the identified like-kind replacement properties the entire 1031 exchange transaction will be disallowed.

IRS Reporting

IRS Form 8824, Like Kind Exchanges: Requires that you provide the IRS with the description of your relinquished and replacement properties, the date your relinquished property was acquired by and conveyed to the buyer, the date the like-kind replacement property was identified to your Qualified Intermediary by you, and the date the like-kind replacement property was acquired by and conveyed to you. These last two (2) items are to ensure that you have complied with the 45 calendar day identification rule and the 180 calendar day 1031 exchange period. IRS Form 8824 also asks for any related party information. Click here to download IRS Form 8824.

IRS Form 4797, Reporting Gain: Any taxable gain recognized will be reported on IRS Form 4797 or Schedule D depending on the character of the relinquished property. Your taxable gain must be allocated between ordinary income depreciation recapture, unrecaptured Section 1250 taxable gain, Section 1231 taxable gain, and capital gain.

IRS Form 6252, Installment Sales: You may be able to report all or a portion of the taxable gain under the installment sale basis pursuant to Section 453 of the Internal Revenue Code if you accepted a seller carry back note as part of the consideration from the buyer of your relinquished property by completing IRS Form 6252.