1031 Exchange - A 1031 Exchange is a vehicle created by the IRS that allows a property owner to defer payment of capital gains tax from the sale of investment property. The sale proceeds are placed into an Exchange account with a qualified intermediary, such as Allied 1031 Exchange, and are then used to acquire new investment property.

200% Rule - If an exchanger identifies more than 3 possible replacement properties, the total value of those properties cannot exceed 200% of the value of the original property.

95% Rule - If an exchanger identifies more than 3 possible replacement properties and exceeds the 200% rule, the exchanger must acquire at least 95% of the property identified.

Balancing Equity - In order to defer all capital gains tax, the exchanger must acquire property of equal or greater value to the relinquished property. The exchanger must also have an equal or greater amount of equity in the property acquired. If the property acquired is of less value than the relinquished property or the exchanger has less equity in the acquired property, the exchanger has received ‘boot’.

Boot - When an exchanger receives a portion of the sale proceeds, they have received ‘boot’. ‘Boot’ may come in the form of cash or debt relief. Any ‘boot’ received will be subject to capital gains tax. The remaining proceeds held in the Exchange are still tax-deferred.

Constructive Receipt - The exchanger must not have ‘constructive receipt’ of the sale proceeds. If the exchanger does receive the sale proceeds, a taxable event has occurred.

Held For Investment - The IRS requires that the property exchanged be "held for investment". In general, any real estate, other than one’s primary residence, is considered to be ‘held for investment.’

Exchange Period - The IRS allows the exchanger 180 days from the sale of the relinquished property to acquire replacement property.

Identification Period - The IRS allows the exchanger 45 days from the sale of the relinquished property to identify up to 3 possible replacement properties.

Like-Kind - In a 1031 Exchange, the relinquished property and the replacement property must be of ‘like-kind’. For purposes of an Exchange all real estate qualifies as ‘like-kind’. For example, an office building may be exchanged for raw land, raw land may be exchanged for a rental property, etc. The ‘like-kind’ requirement is stricter when exchanging tangible property, such as construction equipment.

Relinquished Property - This is the exchanger’s current investment property, which will be ‘relinquished’ in the 1031 Exchange.

Replacement Property - This is the exchanger’s new investment property, which will be acquired in the 1031 Exchange.

Qualified Intermediary - The IRS requires the use of a Qualified Intermediary for all 1031 Exchange transactions. The Qualified Intermediary holds the funds on behalf of the exchanger. The funds are then released when new investment property is acquired.

Tax-Deferral - When an exchanger defers payment of capital gains tax, they have delayed tax payment until the sale of their new investment property. They can, however, enter into another 1031 Exchange and continue to defer payment of all capital gains tax.

Questions Answered Types of Exchanges
Allied 1031 Exchange is a qualified intermediary as required by the IRS to facilitate your 1031 Exchange and does not provide legal or accounting services. Please consult your attorney or accountant for legal and accounting advice.
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