Iowa Equity Exchange — TO COMBINE OR NOT TO COMBINE - THAT IS THE QUESTION (2024)

FAQs

Can you combine 2 1031 exchanges? ›

First we must establish the fact that more than one property can be sold and/or purchased within one 1031 exchange. In other words, a taxpayer can sell two or more properties and combine those sales into one exchange, out of which the taxpayer can buy one replacement property.

To qualify for a 1031 exchange, both the new and old properties have to be held as an investment or used in a trade or business. Held for investment means holding the property for future appreciation. Used in a trade or business means income-producing, such as used in a business or used as a rental property.

To conduct a 1031 exchange, you must successfully swap two properties of similar value without incurring sales tax, at least until you cash out. The primary requirement is that the current property and the replacement property be of the same price. There are two important timing rules you also need to observe.

The taxpayer and the related party must hold the properties that each received as part of the 1031 Exchange transaction for a minimum of two (2) years. The two (2) year holding period starts running on the date of the transfer or conveyance of the last property involved in the 1031 Exchange related party transaction.

How does the 200% Rule work? Exchangers can identify any number of properties as long as the gross price does not exceed 200% of the fair market value of the relinquished property (twice the sale price). It is typically used when an investor wants to identify four or more properties.

You can continue to replace one property with another time and time again. You can even make a 1031 exchange where you buy into multiple properties. Once you sell your property and decide not to reinvest the money into another property however, you will have to pay capital gains taxes on the proceeds of the sale.

President Biden has released his proposed budget for 2024, which again looks to eliminate 1031 like-kind exchanges.

In 2023, individual filers won't pay any capital gains tax if their total taxable income is $44,625 or less. The rate jumps to 15 percent on capital gains, if their income is $44,626 to $492,300. Above that income level the rate climbs to 20 percent.

95% Rule.

The 95% rule says that a taxpayer can identify more than three properties with a total value that is more than 200% of the value of the relinquished property, but only if the taxpayer acquires at least 95% of the value of the properties that he identifies.

If the purchase of one of the properties fell through, the entire 1031 exchange will be disqualified because the exchanger did not acquire 95% of the fair market value identified (9/10 =90%). Of course, the result could be different in scenarios where some of the properties are more valuable than the others.

What voids a 1031 exchange? ›

If an investor touches any of the money made when she sold a property, she will immediately be subject to paying taxes. Spending the money or moving it into an investor's account would incur penalties; such actions void the 1031 exchange.

Under IRC §1031, the following properties do not qualify for tax-deferred exchange treatment: Stock in trade or other property held primarily for sale (i.e. property held by a developer, “flipper” or other dealer) Securities or other evidences of indebtedness or interest. Stocks, bonds, or notes.

The two most common situations we encounter that are ineligible for exchange are the sale of a primary residence and “flippers.” Both are excluded for the same reason: In order to be eligible for a 1031 exchange, the relinquished property must have been held for productive in a trade or business or for investment.

The IRS investigates 1031 exchanges on a case-by-case basis. While there are no definitive rules on a holding period for a 1031 exchange property, it has made rulings indicating that a holding period of two years has been considered sufficient in order to meet the qualified use test.

There is no restriction on the number of times you can participate in a 1031 exchange. As long as you meet all the requirements and have an experienced intermediary by your side, you can use this tool as often as possible to minimize your capital gains taxes.

When it comes to the 1031 exchange, what is the 45 day ID rule and why is it so important? Measured from when the relinquished property closes, the Exchangor has 45 DAYS to nominate (identify) potential replacement properties and 180 days to acquire the replacement property.

For example, if an investor sells their Relinquished Property for $1,000,000, they could identify five properties each worth $400,000 for a total identified value of $2,000,000, or 200% of the relinquished property value.

If you do not identify or acquire the replacement property within the 45 days, you are not able to complete a valid exchange. In addition to making sure you identify replacement property within 45 days, you must identify it unambiguously. That generally means using a legal description or street address.

Your personal use of the property, including occupancy, must not exceed either 14 days or 10% of the total number of days you rented out the property within 12 months. This exchange only applies to single-owner properties. Once the 24 months conclude, you can move into the property and declare it a primary residence.

As such, when it comes to real estate flipping and 1031 exchanges, these two activities are incompatible. They have different investment purposes, adhere to different processes, and generally follow different hold periods.

Can I buy a property I already own with 1031 exchange? ›

Technically, you can't use a 1031 exchange to pay off a property you already own. Under a typical 1031 exchange, the taxpayer can defer income tax liability and capital gains by exchanging property for another like-kind replacement property as dictated by the Internal Revenue Service (IRS) for a specific period.

This can happen for many reasons, including: Failure to identify a replacement property within 45 days of the close of the relinquished property. Failure to close on the replacement property within 180 days of the close of the relinquished property. Inability to find a suitable replacement property.

Another reason someone would not want to do a 1031 exchange is if they have a loss, since there will be no capital gains to pay taxes on. Or if someone is in the 10% or 12% ordinary income tax bracket, they would not need to do a 1031 exchange because, in that case, they will be taxed at 0% on capital gains.

Searching for that perfect replacement property. There are three principal reasons why Section 1031 Exchanges fail: A failure on the Exchangor's part to identify property choices by the 45th day. The choice of Replacement Property becomes unavailable, with no backup identified.

Relevant Holding Period for Sale of a Carried Interest.

If a partner sells its “carried interest” in a partnership, the gain will generally be long-term capital gain only if the partner has held the “carried interest” for more than three years, regardless of how long the partnership has held its assets.

For 2023, you may qualify for the 0% long-term capital gains rate with taxable income of $44,625 or less for single filers and $89,250 or less for married couples filing jointly. The rates use “taxable income,” calculated by subtracting the greater of the standard or itemized deductions from your adjusted gross income.

Key Takeaways. You can sell your primary residence and be exempt from capital gains taxes on the first $250,000 if you are single and $500,000 if married filing jointly.

You are not required to reinvest 100 percent of your sales proceeds. When you don't exchange all your proceeds, it's called a “partial 1031 exchange.” The portion of the exchange proceeds that are not reinvested is called “boot,” and are subject to capital gains and depreciation recapture taxes.

Commercial property including rental properties, condominiums, shopping centers, strip malls, timberland, gas and water interests, and land represent real property eligible for a 1031 exchange. One of the popular examples of 1031 Exchange replacement properties include Delaware Statutory Trusts or DST properties.

Yes, you can always add cash into your 1031 Exchange. Recall the three basic rules that must be followed to achieve a full tax deferral: You must purchase replacement properties equal to or greater in value than the property you are selling. You must reinvest all your net proceeds.

What is the 2 of 5 rule for 1031 exchange? ›

The 2-out-of-five-year rule states that you must have both owned and lived in your home for a minimum of two out of the last five years before the date of sale. However, these two years don't have to be consecutive, and you don't have to live there on the date of the sale.

If a property has been acquired through a 1031 Exchange and is later converted into a primary residence, it is necessary to hold the property for no less than five years or the sale will be fully taxable.

Both properties must be of equal or greater value

To qualify for 100% tax deferment, the net market value of the exchange property you're purchasing can't be of a lesser value compared to the relinquished property you've sold.

Section 1031 allows investors in business properties to defer taxes on the profits of properties sold in order to raise cash to purchase other properties. It is sometimes called the Starker Loophole because the sale and purchase do not need to be simultaneous to qualify for the tax deferral.

Exchanges are written into the U.S. Tax Code and have been available to taxpayers in one form or another for almost 100 years. Exchanges have been available in their current structures since 1986 and are not a loophole or some “tax magic.” Exchanges are allowed as part of the rules!

A successful 1031 exchange isn't a do-it-yourself project. You must follow IRS rules to realize the tax deferral benefits and you'll need a middle person, called a qualified intermediary (QI).

Examples of property that does not qualify for tax-deferral treatment under Section 1031: Personal use properties. Property held for sale, such as spec homes, building lots and “flips” Partnership interests. Stocks, including that of a Real Estate Investment Trust (REIT), and bonds.

Section 1031 is a federal tax code, so it is recognized in all states, so you can exchange from state to state. We regularly are dealing with transactions from our home state of Oregon and into California, Washington, and vice versa.

Unlike a 1031 exchange, a DST allows the seller to diversify into other holdings, including assets or financial instruments that are not typically allowed by other capital gain deferral methods, such as stocks, bonds, or mutual funds.

If you cannot complete your 1031 exchange, then your qualified intermediary may be able to transfer the funds from your property sale to the deferred sales trust. By transferring to the trust, you can avoid constructive receipt and defer your capital gains tax.

What is the 180 day rule for 1031 exchanges? ›

One key milestone within the 1031 Exchange timeline is the 180-Day Rule. Within the 180 days after closing on your relinquished investment property, you must close on the purchase of your replacement property. Get 1031 Properties will oversee the closing of your replacement property from start to finish.

The exchange funds can be used only to buy Replacement Property, pay closing costs or pay off a mortgage or deed of trust covering the Relinquished Property.

The ownership transfer should not take place immediately after the completion of a 1031 Exchange. Investors should wait 1-2 years before considering it.

Most investors swap two properties via a 1031 exchange – an old property is sold and replacement property is purchased. However, you can identify up to three properties in a 1031 exchange. Once you identify the three properties you intend to sell, you can identify up to three replacement properties.

If you have owned and occupied your property for at least 2 of the last 5 years, you can avoid paying capital gains taxes on the first $250,000 for single-filers and $500,000 for married people filing jointly.

A 1031 exchange must be reported for the tax year in which the exchange was initiated through the sale of your first relinquished property regardless of when your replacement property was acquired. You must NOT file your tax return until your exchange is complete.

There is no restriction on the number of times you can participate in a 1031 exchange. As long as you meet all the requirements and have an experienced intermediary by your side, you can use this tool as often as possible to minimize your capital gains taxes.

Your 1031 exchange must be reported by completing Form 8824 and filing it along with your federal income tax return. If you completed more than one exchange, a different form must be completed for each exchange.

Technically, you can't use a 1031 exchange to pay off a property you already own. Under a typical 1031 exchange, the taxpayer can defer income tax liability and capital gains by exchanging property for another like-kind replacement property as dictated by the Internal Revenue Service (IRS) for a specific period.

You could elect both a 121 Exclusion and a 1031 Exchange if the real property was used or held as investment property and as your primary residence concurrently at the date of sale (split use).

Can you do a 1031 exchange without a qualified intermediary? ›

To have a valid 1031 exchange, a qualified intermediary (“QI”) must be assigned the seller's rights to proceeds under the contract and transfer the relinquished property on behalf of the seller, pursuant to an exchange agreement.