Frequently asked questions

What is a 1031 Exchange?

Like Kind Exchanges, also known as tax-deferred exchanges, are defined by IRC section 1031. Since 1921, section 1031 has permitted a taxpayer to exchange business-use or investment assets for other like-kind business use or investment assets without recognizing taxable gain on the sale of the old assets. Tax rules for non-simultaneous exchanges require the use of an independent third party Qualified Intermediary (QI). The QI holds the sale proceeds for the benefit of the taxpayer during the exchange, disbursing funds for purchase of like-kind replacement property, and returning any unused funds to the taxpayer at the end of the exchange. Section 1031 Exchanges must be completed within 180 days. Taxpayers recognize gain and pay tax on any unused funds or when they ultimately “cash out” of their property.

vesting issues

For an exchange to satisfy IRC §1031, the taxpayer that will hold the title to the Replacement Property must be the same taxpayer that held title to the Relinquished Property. However, business considerations, liability issues, and lender requirements may make it difficult for the Exchanger to keep the same vesting on the Replacement Property. Exchangers must anticipate these vesting issues as part of their advanced planning for the exchange.

does my property qualify?

Any real property held for productive use in a trade or business or for investment can be exchanged for like-kind real property. Like-kind refers to the nature of the investment rather than the form. Any type of investment property can be exchanged for another type of investment property.

how do i get started in a 1031 Exchange?

Getting started with an exchange is as simple as calling your Exchange Facilitator. Before making the call, it will be helpful for you to have information regarding the parties to the transaction at hand (for example, names, addresses, phone numbers, file numbers, and so on). During the phone call, the exchange coordinator will ask questions about the property being relinquished and any proposed replacement property.

what are the requirements in an exchange?

From the time of closing on the relinquished property, the investor has 45 days to nominate potential replacement properties and a total of 180 days from closing to acquire the replacement property.

Identification requirements: The investor must identify the replacement property prior to midnight on the 45th day. The investor normally nominates three potential properties of any value, and then acquires one or more of the three within 180 days.

Identify up to three properties of any value with the intent of purchasing at least one.
Identify more than three properties with an aggregate value that does not exceed 200% of the market value of the relinquished property.
Identify more than three properties with an aggregate value exceeding 200% of the relinquished property, knowing that 95% of the market value of all properties identified must be acquired.

IS IT OK TO GO DOWN IN VALUE AND REDUCE THE AMOUNT OF DEBT I HAVE IN THE PROPERTY?

An exchange is not an “all or nothing” proposition. You may proceed forward with an exchange even if you take some money out to use any way you like. You will, however, be liable for paying the capital gains tax on the difference (“boot”).

IS IT POSSIBLE TO EXCHANGE OUT OF ONE PROPERTY AND INTO MULTIPLE PROPERTIES?

It does not matter how many properties you are exchanging in or out of (1 property into 5, or 3 properties into 2) as long as you go across or up in value, equity and mortgage. The only concern with exchanging into more than three properties is working within the time and identification restraints of section 1031.

HOW LONG DOES A PROPERTY NEED TO BE HELD PRIOR TO DOING AN EXCHANGE?

The tax code does not provide a specific time period for holding investment property. Time is less important than the investor’s intent at the time of acquiring the property (that is, did the investor intend to hold the property as an investment).

ARE YOU SECURED/INSURED?

While the exchange industry as a whole is not regulated, we take great pride in making sure each one of our clients feels comfortable and safe during their exchange. We are backed by a fidelity bond, which insures up to $1,000,000 for each occurrence. Additionally, Lanco Exchange Services maintains an Errors and Omissions policy to insure our work; this policy covers up to $1,000,000 per claim. Copies of these policies are available upon request.

CAN I DO A CASH-OUT REFINANCE PRIOR TO AN EXCHANGE IN ORDER TO PAY OFF OTHER LOANS?

The whole point of the 1031 Exchange is moving investment money forward to invest in more property. Pulling money out tax free prior to the exchange would contradict this point. For this reason, you cannot refinance a property in anticipation of an exchange. If you do, the IRS may choose to challenge it.

WHAT ARE THE RULES ABOUT CANCELING AN EXCHANGE?

It is possible to cancel an exchange but the cost and timeframe in which you can terminate a deal varies from facilitator to facilitator. The issue with exchange termination is the constructive receipt concept. Section 1031 requires the taxpayer not have actual or constructive receipt of the exchange proceeds. If a taxpayer can simply ask for and receive the funds at anytime, the exchange procedure may not be defendable.

Therefore, it is possible to terminate an exchange at the following times:

1. Anytime prior to the close of the relinquished property sale.

2. After the 45th day and only after you have acquired all the property you have the right to acquire under section 1031 rules.

3. After the 180th day.