Among our specialties at District, is helping clients navigate 1031 Exchanges. It can be complicated, but it can also be a valuable and lucrative tool for clients. Learn more below and reach out to see how we can help you. .

WHAT IS A 1031 EXCHANGE?

In broad terms, a 1031 Exchange (also referred to as a "like-kind exchange") provides an exception to a seller of a business or investment property for the payment of tax on the gain at the time of the sale. The exception allows a seller to postpone paying tax on the gain if the seller reinvests the proceeds in similar property as part of a qualifying like-kind exchange. Gain deferred in a like-kind exchange is tax-deferred, but it is not tax-free. The use of a 1031 Exchange has always been a powerful tool for owners of investment and business property

WHAT QUALIFIES AS A “LIKE-KIND” EXCHANGE?

Both the relinquished property and the replacement property must meet certain requirements, like being held for use in a trade or business or for investment and be similar enough, to be considered "like-kind".

• Relinquished Property: - The property that is being sold, also known as the "down-leg property"..
• Replacement Property:- Also known as the "up-leg property" must qualify as" like-kind" - property of the same nature, character or class.
• Qualified Intermediary: - Also known as a "QI or Accommodator", enters into a written agreement with the Exchangor and facilitates the 1031 Exchange by holding proceeds from the sale of the Relinquished Property in a trust or escrow account and transfers the Replacement Property to the Exchangor
• Identification Period: - 45 days from the date the relinquished property is sold.

• 3 Property Rule - Most commonly used rule, Exchangor may identify up to three replacement properties and may acquire one, two or all three.

• 200% Rule  - Exchangor can identify any number of Replacement Properties, as long as total fair market value of the identified properties is not greater than 200% of the fair market value of what was sold (Relinquished Property).

• 95% Rule - Least commonly used rule, Exchangor can identify more than three properties with a total that is more than 200% of the value of the Relinquished Property, but only if the Exchangor acquires at least 95% of the value of the properties that are identified.

• Closing Period: - Replacement Property must be received and the exchange completed within 180 days after the sale of the Relinquished Property.

REVERSE EXCHANGE

Property owners can also utilize the Reverse Exchange, which involves first acquiring the Replacement Property before the Exchangor sells the Relinquished Property. The Replacement Property is acquired through an exchange accommodation titleholder, where it is "parked" for no more than 180 days. The Exchangor must identify what Relinquished Property will be sold within 45 days after the accommodator closes on the Replacement Property. During the time the property is "parked", Exchangor sells the Relinquished Property.