Frequently Asked Questions

Do I need a qualified intermediary to complete a 1031 Exchange?

Yes, a qualified intermediary (QI) is required to qualify for a safe harbor under the regulations. The QI is mandatory because one ironclad rule of a like-kind exchange is that the buyer isn’t allowed to take possession of any funds during the exchange process. The QI also prepares the documentation necessary to ensure that an exchange follows the IRS’ rulebook and deadlines.

What properties do not qualify for tax deferral under Section 1031?

Your principal residence and personal-use property do not qualify for Section 1031.  There is a special tax provision under Section 121 that provides forgiveness (exclusion) of gain on sale of a principal residence but, effective January 1, 2018, the amount of gain forgiven is limited to $250,000 for a single taxpayer and $500,000 for a joint return.  In highly appreciated areas, this may not be sufficient.

What is an accredited investor?

Anyone who earned income that exceeded $200,000 (or $300,000 together with a spouse or spousal equivalent) in each of the prior two years, and reasonably expects the same for the current year, or has a net worth over $1 million, either alone or together with a spouse or spousal equivalent (excluding the value of the person’s primary residence), or holds in good standing a Series 7, 65 or 82 license.

In a Section 1031 exchange, is my gain deferred or forgiven?

The tax basis in your relinquished property carries over to the replacement property.  Section 1031 defers the gain that otherwise would be recognized; Section 1031 does not forgive the gain.  But you may exchange over and over and over again, creating almost perpetual deferral during your lifetime.
Many taxpayers use Section 1031 to build family wealth in real estate during their lifetime.  When the taxpayer dies, the heirs get a “stepped up” basis to fair market value.  That means the heirs can sell without having taxable gain.
So, while 1031 defers the taxable gain, the gain can be deferred for a lifetime and may be forgiven on death.  This is whimsically called “swap until you drop”.

How does debt on my relinquished property affect my exchange?

Debt on the relinquished property must be offset by debt on the replacement property. A leveraged DST can provide a simple and convenient way for exchange investors to satisfy Section 1031 equity and debt replacement requirements. When purchasing an interest in a DST, investors not only acquire an interest in the property, but also acquire an interest in any debt held by the Trust. Importantly, as beneficial owners of a DST, investors do not have to qualify for or bear any responsibility for the Trust’s loan.