December 26, 2017:

1031 Tax Deferred Exchange info

1031 Rules and Procedures:

1.   State prior to sale you (Exchanger) will do the 1031 exchange.  Exchanger should consult with a competent tax attorney before entering into an agreement.

2.   Must Acquire “Like Kind” Real Estate (Real Property).  Add 1031 Clause to the Purchase agreement.  Must acquire the property in the name you conveyed title to the property you sold.

3.   Property acquired must be held for investment (1 yr or more)

4.   To avoid Tax,  The total amount of gain must be exchanged and what is not gets taxed. To Purchase a more expensive property, you would have to add your own funds.  To Purchase a less expensive property would result in taxable income on the portion not spent.


  • In order to successfully defer your tax consequences from the sale you must buy a replacement property(s) with a value equal to or greater than the sum of the loan paid off plus the proceeds (gains) of the sales.  If you are selling other properties as part of the same exchange then the same dollar values must be added to it.
  • In some cases you can do a “partial exchange” – in which you need to consult your tax advisor about.


5.   Hire a Qualified Intermediary.

Funds may not be held by the Exchanger or it will invalidate the exchange.  Attorneys, real estate agents, accountants etc. may not hold funds either.

  1. Simultaneous Exchange (Trade)
  2. Delayed Exchange = Most Common


Exchanger transfers legal title to Intermediary & or Exchanger conveys title.

Exchanger holds all or part of the funds in a trust account, which interest earned may be credited to the Exchanger– un-held funds get taxed.


You can sell a property using a note and trust deed to finance the sale.  The Note and trust deed may be made out to the Exchanger If this is done the note is taxable and may not be used to buy replacement property.  If it is made out to the intermediary you have 4 options.

  1. You can trade it to the Seller for part equity in the new property (Like Cash)
  2. Intermediary can sell the note on the open market & add the proceeds to the exchange amount. (you will probably get a discounted $ amount of the note)
  3. Closely related party can purchase the note or provide financing so the Intermediary receives the cash at closing.  Consult you tax advisor about this one.
  4. You can wait until the 45 days is up and get the note back but owe the taxes on it.


Exchanger signs 3 documents with Intermediary.

  1. Deferred Exchange agreement.
  2. Assignment of Seller’s interests to Intermediary
  3. Escrow Agreement to hold funds in an account.


Intermediary then coordinates with Closing Atty.


6.   Identification Period


Exchanger has until midnight on the 45th day from Closing of relinquished property to identify up to 3 properties, no price limit, with Intermediary.


If Exchanger wants to identify more than 3 then the 200% Rule applies.  You must add all the values of the properties.  They must not exceed twice the value of the relinquished property.


You then submit the properties you wish to pursue with the Intermediary by mailing, faxing, Emailing (as long as you have proof of receipt by Intermediary) the legal descriptions, addresses, locations etc that clearly describe the properties.


If at some point within the 45 days you decide not to pursue the exchange or you do not find a suitable replacement, you must wait the 45 day period to receive the funds back from the Intermediary, at which time you will owe the tax on the amount held.


7.  Closing

            Must take place within 180 days from the Closing of the relinquished property or by April 15, whichever shall first occur.  If you get an extension on your filing deadline, you can recapture the lost days.

Intermediary shall then notify and coordinate with the closing Attorney and the deed will be deeded to the Exchanger.  The Closing statement will show the Intermediary as the buyer.  Closing will occur and a successful 1031 tax deferred exchange has happened.


Advantages of Exhanging

  • Avoid paying taxes and Conserve Equity
  • Moving property geographically – be able to acquire something closer to you or where you move to.
  • Increase cash flow – Acquire an income producing property
  • Improve investment Appreciation – buy a prop in the path of growth
  • Consolidation or Diversification of investments
  • Eliminate management hassles – Buy a less intensive management piece
  • Keep 100% equity working in the future – no loss of capital due to taxes



Hold for 1 year minimum

Must be an investment, land vacant or income producing.  Owner can only use 14 days out of the year for enjoyment, not including fix up days. 

Must show a serious effort to lease the property and get tenants– burden of proof is on the owner.


Primary Home Sale:

Gain on a primary sale is exempt $250k for a single and $500k joint.  The residence must have been used as the primary residence for 2 out of the 5 years ending on the date of the sale.  Can only use the exclusion once every 2 years.  There may be further restrictions if depreciation has been taken or if the home has been used as on office.