1031 Checklist

[   ] 1031 is an Incentive—not a loophole.  It’s a tax incentive for owners of certain real estate to exchange it for other such property to  encourage the re-investment   to expand the market, stimulate the economy and create jobs.

[   ] What kind of property does the IRS target?  They call it  Like-Kind in the sense only that they must be   held primarily for business or investment purposes—not principal residences or personal vacation homes.

[   ] Your incentive is to defer the tax.  If you SELL real estate, you will pay tax on capital gain (the gain you realize). But  under 1031 your gain on the property you give up is not recognized—it is  deferred   until and unless you later SELL what you got in exchange.

[   ] How do you benefit? If your tax for a SALE would have been  $20,000, for example,  that would be deferred with a 1031  so  you would not have to pay it now. But  you'd have to pay in 5 or 10 years if you SELL the replacement (by then a tank of gas might cost $1,000).  But if you’d done another 1031 instead of a sale, it would  defer the tax indefinitely. Meanwhile  you’ll have   $20,000 extra to invest  in  better replacement property  that will  produce more income  and will  appreciate more with leverage.

[   ] Make two contracts into one exchange.  You have  one contract to sell  to a buyer  and another to buy  from a different seller. You can  sign an agreement with an intermediary  for you  to exchange what you will give up for what you want to get in return. You  assign both contracts  to the intermediary. The  intermediary will sell to your buyer,  park  (escrow)  the sale proceeds, then  buy the replacement from your seller.  You do not touch the money. Your deed goes directly to buyer and seller's deed goes to you—the  intermediary is in neither chain of title. You will  report  the completed exchange  to the IRS.

[   ] You want cash out to boot?  If you get cash (or  anything other than like-kind property) out of the exchange (it’s called  boot) you’ll owe  tax only on the boot  in such a  partial 1031exchange.  To avoid boot  you must, (1)  get replacement property for not less than the sale price of the relinquished property  AND (2)  spend all of the sale proceeds in your exchange account.

[   ] Try different scenarios with your own numbers  on our website (see  CALCULATE YOUR OWN TAX ESTIMATES  below). Always consult your tax and legal advisers.

[    ]  Must be a qualified  exchange. You must have an expertly crafted exchange agreement  with,"Mutually Dependent Parts of an Integrated Transaction” drafted by your Qualified Intermediary (and not by you, your attorney or your real estate agent). Title to the property you get must be registered in the same name(s) as what You gave up—otherwise the IRS could call it a sale.

[    ] Must have a qualified intermediary (called a QI). An IRS release reads,

"You can not act as your own Facilitator. In addition, your Real Estate Agent or Broker, Investment Banker, Broker, Accountant, Attorney, Employee or anyone who has worked for you in those capacities within the previous two years, can NOT act as your Facilitator."

Your qualified intermediary (QI) holds the funds that you may not touch, so the QI must be independent—not “related” to you, otherwise, you would have “constructive possession” of the funds touched by "your agent" and disqualify the exchange. So, your QI may not give you legal or tax advice—use other advisors.

[    ] Must have qualified like-kind properties. Both properties exchanged must be of “like-kind” in the sense only that they are “held primarily for Productive Use in a Trade or Business or for Investment". They are disqualified as non-like-kind if either is held for personal use (like your principal residence or personal vacation home used more than 2-weeks per year). And dealer properties are not qualified (as inventory for sale and not held for business or investment purposes).

Properties of different types might be qualified as like-kind provided they are both being held primarily for trade, business, or investment, for example: a Rent house, Office Building, Retail Shop, Warehouse, Chemical Refinery, Apartment Complex, or any type of Unimproved Land held for business/investment can qualify. And although they may be very dissimilar, the exchange of a Chicken Farm for a Train Station can qualify as a like-kind property.

Properties of the same type might by disqualified as like-kind when they are not both being held primarily for trade, business, or investment. So, a rent house will not be like-kind with your own identical home because your principal residence cannot qualify. If you own two Identical vacation homes but use one personally more than two-weeks in a year, the IRS says that one is your personal vacation home and would be disqualified.

[    ] Must be real estate to qualify: So, things like timber or mineral rights, being "real property interests" may qualify. But the following examples are not: stocks, bonds, cash, or your interest in an entity that may own real estate like a REIT are not qualified.

[    ] Must be United States property to qualify: Only property that is situated within U.S. and the US Virgin Islands is eligible.

[    ] Must be properly identified properties to qualify:  You must properly identify both properties under 1031 or the exchange will be disqualified.

[    ] Must be timely identified properties to qualify, the 45-day Rule:  You must ID the replacement property within 45-days of the closing date of the relinquished property sale. The ID Rules permit you to timely identify 3 properties and you may acquire any 1, 2 or all 3.

[    ] Must be timely acquired properties, the 180-day Rule: You must complete the exchange within 180-days of the closing date of the relinquished property sale or the exchange will be disqualified. [Note that both times start on the sale closing date, you do not get 180 plus 45 days.]

[    ] Must comply with Related Parties Rules: Exchangers must disclose to the IRS if any related parties were parties to the exchange. There are special rules for such exchanges and an abusive shift of tax basis between related parties resulting in tax avoidance could disqualify the exchange.

[    ] Must follow qualified procedure. You must work with an experienced and qualified Intermediary so as to properly "facilitate" the procedure because, you may not control ANY of the proceeds or property given in exchange before the exchange is completed. For example, if a check is Issued to you and even if you immediately endorse It over to your QI, your "constructive possession" may cause the 1031 exchange to fail. IRS guidelines state:

"IT IS IMPORTANT TO KNOW THAT TAKING CONTROL OF CASH OR OTHER PROCEEDS BEFORE THE EXCHANGE IS COMPLETE MAY DISQUALIFY THE ENTIRE TRANSACTION FROM QUALIFYING AS A 'LIKE-KIND' EXCHANGE TREATMENT, AND, MAKE ALL GAIN IMMEDIATELY TAXABLE.

 IF CASH OR OTHER PROCEEDS THAT ARE NOT 'LIKE-KIND' PROPERTY ARE RECEIVED AT THE CONCLUSION OF THE EXCHANGE, THE TRANSACTION WILL STILL QUALIFY AS A 'LIKE-KIND' EXCHANGE. GAINS MAY BE TAXABLE, BUT ONLY TO THE EXTENT OF THE PROCEEDS THAT ARE NOT 'LIKE-KIND' PROPERTY."

So, the best way to avoid premature receipt of cash, or other proceeds is to work with an IRS qualified intermediary such as The 1031 Exchange Center—we only do...1031 Exchanges. Click Non-Binding Inquiry to start.

[    ] Must report the 1031. You must file an IRS Form 8824 "on time" in order to be In legal compliance and to register the exchange with the IRS, to declare the taxable boot you may have received, and to properly transfer your tax basis from your relinquished property to the replacement property.