Property Exchanges: Increasing Awareness and Understanding About 1031 Exchanges
Any property that is held for productive use in a business, trade or investment, can be exchanged for like-kind property. Like-kind refers to the nature of investment, such as a family residence can be exchanged for an office, apartment or raw land for a commercial center. It is a flexible investment strategy that can apply any combination basing on the exchanger’s 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.
You need to contact your exchange facilitator to get started, and it is helpful to prepare all the information you need before making a call, so you’re ready to answer questions about the property that needs to be relinquished or replaced. 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. You can check and obtain the name of the facilitator from attorneys, escrow companies, CPAs, real estate agents or from the internet in preparation for property exchange. The exchange fees varies form one company to another, but it often ranges from $400 to $750.
Identification requirements are needed prior to midnight on the 45th day, because an investor has 45 days to submit a nomination of the potential replacement property, and a total of 180 days from closing to acquire the replacement property. An investor can submit up to three potential properties of any value, and must acquire one or more of these properties within the 180 period. After closure of the relinquished property, an exchanger is also required to provide 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. The number of properties you can exchange doesn’t matter as long as you go across or up in the equity, value and mortgage.