1031 Frequently Asked Questions:

Can I exchange a property if I do not own 100% of the relinquished property?
Many taxpayers may hold a fractional interest in a property, but would like to exchange their interest. A tenant in common interest may be exchanged, and the taxpayer may purchase a fractional interest in the replacement property as well. These types of transactions are becoming very popular among investors who would like to invest together with other investors. However, the interests of partnerships or other entities cannot be exchanged.

Can I sell or buy several properties when exchanging?
Many exchangors would like to sell several properties to acquire one (or more) replacement property (ies), or many want to sell one property to acquire several replacement properties. A multiple leg exchange is allowed, however, the identification and acquisition period begins when the first relinquished property is exchanged. This may limit the exchangor if they intend to perform one exchange transaction. As a result, it may sometimes be best to structure the exchange as several transactions rather than one.

Do I receive a cost basis in my replacement property?
The tax basis from the relinquished property is carried over to the replacement property when performing an exchange. The tax basis in the replacement property is increased by additional cash or by the increase in debt used to acquire it.

Does my accommodator report my exchange to the IRS?
The role of the accommodator is to hold funds during the exchange period, not to file a tax return for the exchangor. At the close of escrow, the IRS form 1099S will show that the exchangor will receive property as consideration for the sale of the relinquished property. The IRS form 8824 must be completed with the taxpayer's annual federal tax return. This form determines the realized gain, recognized gain and basis of the like-kind property received. It also asks for the description of the property sold and purchased, and the dates of identification and acquisition of exchange property. In addition to form 8824, the taxpayer must also report the exchange on their state return. In Oregon , form 24 is used to report the exchange of property.

How should I take title to the replacement property?
Many taxpayers will sell as one individual or entity and will attempt to acquire title to the replacement property in the name of another individual or entity. When performing an exchange, the title to the replacement property should be the same name in which the relinquished property was held. 

If I don't spend all of my sale proceeds, when can receive the remaining funds?
If the taxpayer acquires all identified properties, the remaining exchange funds can be released to the exchangor at that time. However, if the exchangor does not acquire all identified properties, then the unused funds cannot be released until the end of the 180- day exchange period, or the due date of the exchangor's tax return.

Can I take a note on the sale of the relinquished property?
If a relinquished property is sold and the exchangor takes a note and trust deed as part of the consideration, the note would be taxable. To avoid this taxable event, the note and trust deed can be made in the name of the QI.

• The replacement property can be acquired by assigning the interest of the note and trust deed to the seller for part of the equity in the new property.
• The QI can sell the note and trust deed to a third party. This will allow the exchangor to have all cash from the note and trust deed to acquire the replacement property.
• The note and trust deed can held by the QI until the end of the exchange period, and then assigned back to the exchangor. The will result in boot, however, the exchangor will only have to pay tax on the amount received each year.

If I have already signed a contract or opened escrow, is it too late for my to treat my sale as an exchange?
As long as the sale is not closed, the exchange can still be completed. Contacting an accommodator as early as possible is a good idea. This will help insure that all escrow paperwork is correct and the exchange papers are prepared in time. Once the sale is closed, it would be too late to perform a 1031 exchange.

How should items such as rents and deposit be handled when performing an exchange?
Any sale proceeds used to transfer rents and security deposits to the buyer would be considered boot, resulting in a taxable event. These items should be handled outside of escrow, or these non-transaction costs should be paid for by making a separate deposit into the escrow.

Can I exchange if the property is partially a residence and partially an investment property?
Many exchangers may sell or buy a property that is used for personal and investment purposes. In this situation, an allocation must be made to determine the percentage of value that can be exchanged.

Can I convert the replacement property into a principal residence?
Oftentimes taxpayers will change the use of the replacement property, and may like to use it as a principal residence. Although there are no specific regulations on how long a property should be used as an investment property, it is generally recommended that the property be held for at least two tax returns before converting it's use.

What is a ‘reverse exchange'?
A reverse exchange, sometimes called a ‘parking arrangement', occurs when a taxpayer acquires replacement property before selling their relinquished property. A ‘pure' reverse exchange where the Taxpayer owns both the relinquished property and the replacement property at the same time is not allowed. The actual acquisition of the ‘parked' property is done by an Exchange Accommodation Titleholder, or parking entity.

Can proceeds from the relinquished property be used to make improvements on the replacement property?
Yes – this is known as a Build-to-Suit or Construction or Improvement Exchange. When performing an exchange the taxpayer is not permitted to build on the property they already own. Therefore, an unrelated party or parking entity must take title to the replacement property, make the improvements, and convey title to the taxpayer before the end of the exchange period.

Are IRC 1031 Exchanges limited to just real estate?
No – any property that is held for productive use in a trade or business, or for investment, may qualify for tax-deferred exchange under IRC 1031. In fact, many exchanges are ‘multi-asset' exchanges involving both real estate and personal property.