Expert Advice on 1031 Real Estate Exchanges

We sat down with John Mangham and Diane Rivera from Craft 1031 Solutions to learn more about the unique tax savings a 1031 real estate exchange provides. Huge thanks to these industry veterans for sharing their knowledge with us. 

*Interview edited for length.

What is a 1031 Exchange? 

An IRC §1031 exchange, also known as a like-kind exchange, is a tax-deferred transaction that allows owners of investment or income-producing real estate to sell their property and acquire a replacement property or properties of equal or greater value, while deferring the payment of capital gains taxes.

How does a 1031 Exchange work?

There are five key elements to a successful 1031 exchange:

1: QUALIFYING PROPERTIES

To be “like-kind”, properties involved must be held for investment or income production, such as rental properties, commercial and industrial buildings, or land.

2: TAX SAVINGS

Federal Capital gains tax at 20% (max) and State tax at an average of 6% can be saved in a successful 1031 exchange.

3: TIMING & IDENTIFICATION

Within 45 days of selling the relinquished property, the seller must identify potential replacement property or properties. They have up to 180 days to complete the exchange by acquiring one or more of the identified properties.

4: EQUAL OR GREATER VALUE The replacement property must be of equal or greater value than the net sales price of the relinquished property being sold to avoid taxable ‘boot’.

5: USE OF A QUALIFIED INTERMEDIARY

A Qualified Intermediary (QI) is engaged to meet the exchange of property requirement, will hold the funds from the sale, and facilitate acquisition of the replacement property, ensuring compliance with IRS rules. By following these rules, investors can defer capital gains taxes and build their real estate portfolio. Consulting with professionals is important to maximize the benefits of a 1031 exchange.

What is the timeline for a 1031 real estate exchange transaction?

Within 45 days of selling the relinquished property, the seller must identify their potential replacement property or properties in writing. This identification must be provided to their qualified intermediary. They have up to 180 days from the sale closing to complete the exchange by acquiring one or more of the identified properties.

What are the IRS rules for identifying replacement property?

The IRS provides three rules in which you can identify your replacement property(ies). The most common being the 3-property rule, simply put you can identify up to three properties for any total value as potential replacement properties.

The 200% rule allows you to identify more than three properties so long as the fair market value of all properties identified does not exceed 200% of the sales price of your relinquished property. If both the 3-property rule and the 200% rule are exceeded, the 95% rule requires that the taxpayer purchase at least 95% of the total value of all properties identified or the exchange fails.

What is a “like-kind” property?

For a 1031 exchange to be valid, your properties must be like-kind. As it pertains to real estate, all real estate is like-kind to other real estate. Some examples would include: an apartment complex exchanged for a cell tower easement; an office building for farmland; or a rental home for a duplex. The only real estate that does not qualify under a 1031 exchange is a personal primary residency and a “pure” second/vacation home.

Why should I use a qualified intermediary?

A Qualified Intermediary (QI) is the key to a successful real estate exchange. A QI is used to meet the exchange of property requirement, hold the funds from the sale and facilitate the acquisition of the replacement property, ensuring compliance with IRS rules. By following these rules, investors can defer capital gains taxes and build their real estate portfolio. Consulting with qualified professionals is important to maximize the benefits of a 1031 exchange.

At Craft 1031, our principals have over three decades of exchange knowledge and experience. We offer a comprehensive range of services, ensuring a seamless and successful real estate exchange experience. We are committed to equipping our customers with the knowledge and support they need to make informed decisions. Our customers can rest assured that they will receive the highest level of professionalism, accurate exchange documentation, and the utmost safety and security of their exchange funds.

Learn more at craft1031.com.

About the authors:

John Mangham is a CPA and 1031 exchange consultant for Realtors, investors, attorneys, bankers, and accountants. For more than three decades, John has served as a real estate consultant and educator. With extensive experience in the 1031 exchange industry, John understands the planning and preparation required for his clients to achieve successful 1031 exchanges.

 Diane O. Rivera CES®, is a seasoned professional with 28 years of 1031 experience, is a Certified Exchange Specialist®. Known for exceptional expertise and deep understanding of 1031 exchanges, Diane is highly regarded as a trusted advisor by investors and their real estate, tax, and legal professionals. Her meticulous attention to detail, extensive knowledge of IRS §1031 rules, and commitment to providing personalized service make her an invaluable asset to her clients.

Craft Bank is proud to partner with Craft 1031 Solutions, whose principals are Certified Exchange Specialists. We safely hold funds from exchange transactions in FDIC insured accounts. Exchange funds are covered by a 50MM dollar fidelity bond.