1031 Exchange FAQ

Frequently Asked Questions

The 1031 exchange is a powerful tax treatment mechanism that dates back 100 years and necessitates selling your surrendered property and investing 100% of the earnings in a replacement property of like type to defer capital gains taxes. 

In addition, a 1031 exchange enables you to swap out your underperforming surrendered property for one with strong returns. 

Here are the most popular 1031 exchange FAQ lists to guide you through the process if you’re thinking about doing one.

What Type Of Property Qualifies For A 1031 Exchange?

According to the IRS rule book for the 1031 exchange, Investors can only replace like-kind investment property. However, rather than the physical appearance of the property, like-kind refers to the essence of the investment. 

In other words, property ought to be owned only as an investment. This implies that you may trade a multifamily property for an oil field or a business property. However, residential usage of the land is not recommended. 

Additionally, you cannot swap bonds, notes, stocks, partnership shares, or trust certificates. Additionally, homes held “exclusively for sale” are not disqualified. The term “such properties” in real estate refers to assets like unoccupied land or lots that are bought with the intention of selling them again. 

A principal residence is also not included.

How To Do A 1031 Exchange?

You must make contact with a 1031 exchange facilitator to begin the procedure. However, when you make the call, be prepared with pertinent facts, including everyone’s name, company or property type, address, and necessary contact information. 

Additionally, if you have chosen a replacement property, you will need to give the pertinent information for it and the relinquished property you wish to sell. 

When you sell the property you’ve given up, the actual procedure begins. You have 45 days to find up to three replacement properties and finalize all of the deals, or you have 180 days after selling the property that was given up to identify and close on a new, replacement property. 

How Do You Choose The Right 1031 Exchange Advisor?

Browse the internet to get started on your quest. To obtain the required investment advice, get in touch with our group of licensed investment advisors if you want expert assistance. 

Make sure the facilitator isn’t also acting as an agent. This is another issue to think about. That may be a huge warning sign. 

Additionally, confirm that the 1031 exchange facilitator you select is knowledgeable about various 1031 exchanges and has relevant experience in the alternative investment industry.

What You Should Know About the 1031 Exchange Timeline?

The 1031 exchange timeline is possibly the most crucial factor to take into account. To be clear, you have 180 days from the day you sell the relinquished property to finish the procedure. 

A 45-day ID period and a 135-day closure period are the two time frames that make up the 180-day term. In other words, you have 45 days starting the day your property sells, to find up to three comparable replacement properties to reinvest the earnings. 

You will receive the remaining 135 days when your 45-day ID term has ended. To effectively finish the procedure, you must close on the replacement property you have chosen during this time.

What Are The Restraints You Can Face During Your 45-Day ID Period?

You must mention up to three replacement properties throughout the 45-day ID period and give a brief description of each one. A legal description or the address of the property are further options. 

However, you must adhere to ONE of the following guidelines if you want to buy numerous properties: 

  • Identify up to three potential replacement properties, with the goal of purchasing at least one. 
  • Select more than one property as long as the total worth of all the properties does not rise over 200% of the fair market value of the relinquished property. 
  • Select more than one property as long as the combined value of the replacement properties is less than 200% of the fair market value and you intend to buy at least 95% of the total number of properties.

Summing It Up

There are several factors you need to take into account when it comes to the 1031 exchange procedure and FAQ. It is essential to keep the regulations and deadlines in mind for a successful 1031 exchange, from locating the ideal replacement property within 45 days of selling the relinquished property to selecting only like-kind investment property.

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