Frequently Asked Questions

Q: In order to do an exchange, do I have to find someone who wants to swap properties?
A: No! Although an exchange can be done in this manner, the likelihood of finding someone who has property that you want and who wants the property that your currently own is slim at best, if not impossible. The properties must be of similar value and debt structure making the task even more difficult.

Q: May a taxpayer exchange stock for stock?
A: No. Stock was specifically excluded from the 1031 law.

Q: May a taxpayer sell investment property and purchase a retirement home for himself or herself?
A: No, but a taxpayer can purchase an investment home suitable for future occupancy as a retirement home, providing that the tax payer is planning 3+ years ahead.

Q: Is a dealer prohibited from executing a tax-free exchange?
A: A dealer is prohibited from exercising an exchange on inventory property or principal residence. A dealer can do an exchange of investment property and property held in the productive use in trade or business?

Q: May a taxpayer execute more that one tax-free exchange per year?
A: Yes.

Q: I have owned a duplex for over 10 years and I’d like to do an exchange. Am I limited to only acquiring another duplex?
A: The definition of “like-kind” for tax deferred exchange purposes is “any real property held for investment used in a trade or business”. Therefore you are not limited to getting another duplex, you could get an apartment building, raw land, single family rental properties or even an office building.

Q: Are exchanges difficult and costly?
A: No! If you are using the intermediary method of exchanging, you simply sell the investment property you own and acquire a replacement property. The QI coordinates most of the necessary paperwork. You will still need an attorney to close the transactions. The added cost for the intermediary services is typically in the $400-$750 range. Exchanging can be less costly but much more difficult if you are not using the QI method.

Q: May a taxpayer use the same QI more than once in the same year?
A: If the QI was not a “disqualified person” on the first exchange, then they are acceptable for any additional exchanges in that year or in the future.

Q: Is there any way of getting additional time to complete the exchange if one can’t close within the 180 day?
A: Absolutely NOT! There have been no exceptions made, even in natural disasters like Katrina.

Q: Once possible replacement properties have been identified, may the list be altered?
A: Yes, but only if the change is made before the end of the 45th day.

Q: After the 45th day, can the list of identified properties be changed?
A: After the 45th day, no changes can be made, additionally, the three-property, the 200 percent and the 95 percent rules all go into effect.

Q: Is seller financing workable with 1031 Tax-Free exchange rules?
A: It is usually incompatible with a 1031 because a promissory note is property received which does not meet the requirement that real estate be exchanged solely for other like-kind property.

Q: Can a taxpayer have an exchange with a related party (brother, sister, spouse, child…)?
A: Yes, but there is a special rule for exchanges between related parties which require taxpayers exchanging property with each other to hold the exchanged property for at least two years after the exchange to qualify. If either party disposes of the property received in the exchange before the 2 year period, any gain or loss that would have been recognized on the original exchange must be taken into account on the date that the disqualifying disposition occurs.