1031 Exchange FAQ 

One can hear different versions of stories about 1031 exchanges without going through the details of exchange law. This article gives details of some of the more commonly asked FAQs on this subject. Anybody reading this must be clear in mind that this article gives only a basic understanding on this subject and cannot be considered as a substitute for 1031 exchange laws or replacement of 1031 exchange specialist.

FAQ 1 - The 1031 exchange law stipulates that selling and buying should be for property similar in nature. But it is not necessary that they have to be the same type or value for concluding a transaction. For example, in case you sell an independent house and propose to buy one or more apartment buildings and also of higher value, there is no restriction in this type of transaction. However, one cannot purchase cattle using the sale proceeds of a residential house. Persons may be interested in selling an independent house and purchase an apartment building with multiple renters because of the increased income they could get.

A number of 1031 exchanges have taken place for properties of equal value; however, this is not universal. A lot of other transactions of lower sale value and higher purchase value have also taken place. One can deposit the full sale amount of the property as down payment with a 1031 exchange and this permits him to purchase a superior building. In case he does not follow 1031 exchange process, he can use only the amount available after deduction of taxes and this means the funds available for purchase is relatively less thereby permitting him to purchase a property inferior in nature.

FAQ 2 - Another issue that arises in this transaction is the time factor. There is a time period fixed for purchase of a new property after the sale of old property and this period has been fixed as a maximum of 45 days after sale. In case if a person entering into such exchange finds it difficult to complete the transaction in this time frame and if he still is interested in procuring the new property he should make a list of properties he is interested in and submit to the authorities concerned before 45th day. This is to inform the government and company that the transaction is for investment and not for profit. However, he should complete this transaction within 180 days otherwise his 1031 exchange will be terminated and properties taxed.

FAQ 3 -The purpose of 1031 exchange is to encourage people to purchase new property using the sale proceeds of their old property. Persons selling their property cannot do this for making profits. Any profit made in the process has to be accounted for and taxed. This means that the sale income cannot exceed the purchase cost of the new asset.

The above FAQs are basic to 1031 exchange and one must have a comprehensive understanding of the Do’s and Don’ts of this system before venturing into this exchange.