Property Exchanges: Facts About 1031 Exchanges

Any property that is held for productive use in a business, trade or investment, can be exchanged for like-kind property. An example of like-kind property is exchanging a single-family residence to a duplex, an office, apartment or raw land for a commercial center. The exchanger can change investment strategies with flexibility by having any combination to fulfill their needs. You cannot trade certificates of trust, partnership shares, notes, stocks, bonds or other similar items. Property exchange doesn’t allow trading of properties abroad, personal residences or “stock in trade” such as houses built by a developer. A dealer is an investor who tries to exchange too quickly after a property is acquired within a year, and those who deals with stock in trade are not allowed to exchange their own real estate property unless can be proven as for investment. The portion of a primary residence used in business or for investment may qualify for a 1031 exchange.

To get started, you need to simply call your exchange facilitator, and it is helpful to prepare all the information you need before making a call, so you are ready to answer any questions that will be asked about the property being relinquished. You expect that the initial discussion varies dramatically from one company to another with respect to the amount of information needed, but there are companies who are proactive to understand client objectives. To prepare the property exchange process, you may contact an exchange facilitation company and get the name of the facilitator from attorneys, escrow companies, CPAs, real estate agents or from the internet. Exchange fees applies ranging from $400 to $750 with varying service levels.

For the requirements of a 1031 exchange, an exchanger must submit a nomination of the potential replacement property prior to midnight on the 45th day, because an investor has 45 days to submit it, and a total of 180 days from closing to acquire the property. A property investor can submit up to three nominations for potential properties of any value, and must acquire one or more within the 180 period time frame. After closure of the relinquished property, you are also required to submit an “ambiguous description” of the potential replacement property on or before the 45th day. The address of the property or a legal description will suffice. To pay out closing costs, IRS stipulates that it should be considered as a Normal Transaction Cost.

The information needed to structure a 1031 exchange property are the exchanger’s name, address and phone number, and the escrow officer’s name address, phone number and escrow number. It doesn’t matter how many properties you want to exchange, as long as you go across or up in the equity, value and mortgage.