With the 1031 Exchange on our minds for the new year, here is a brief listing of the 10 key 1031 Rules of Play every investor must know in sound-byte short summary*:
1. A 1031 is only for investment and business property.
2. Partnership interests in a business don’t qualify, but interests as a tenant in common (TIC) in real estate do.
3. The IRS term “like-kind” doesn’t mean what you think it means. You can exchange an apartment building for a ranch, or a mobile home park for a strip-mall, etc., but there are traps so beware!
4. It’s hard to find someone with the property you want who also wants to swap with you, so most exchanges are delayed “Starker” exchanges between three parties and a middleman who holds the cash in escrow for you and makes the “purchase” for you. Remember: touch the cash and you kill the exchange!
5. Timing Rule 1: A replacement property must be designated in writing to the middleman within 45 days of the “sale” of your property. The IRS says you can designate up to three as long as you eventually close on one of them (ie. exchange one for two or three!)
6. The 200% Rule: But...you can designate more than three replacement properties (actually, unlimited) as long as the combined fair market value does not exceed 200% of the fair market value of the property you want to exchange. Conversely, you can leverage your property for a more expensive property using the same 200% rule.
7. Timing Rule 2: You must close within 6 months (180 days) of the close of the sale of the old property.
8. “Boot”, or left-over cash after the acquisition of the replacement property, will be taxed (likely as a capital gain.)
9. Don’t forget about mortgages and other debt on your property and the replacement property. If no cash boot came back but the liability decreases, that will be treated as income and it will be taxed!
10. If your mobile home park is also your primary residence or any residence of yours, it may get tricky with the IRS safe harbor rule.
Stay tuned each quarter as we release more of our year-long exclusive guide to your first 1031 Exchange! For the full guide, please visit our Special Reports page on our website at www.mcanuffgroup.com or contact email@example.com.
* Information in this article is intended as an introduction to Tax Deferred 1031 Exchanges, not a substitute for legal and financial advice and is not considered such advice.