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IRS 1031 Exchanges—unraveling the mystery!  

The Exchange Business has gone through a resurgence in the last 3-5 years.  In the early days, only those people with big money, commercial properties, or trusts engaged in the exchange business.  Fortunately, the trend has changed.  Now 1031 exchanges are more and more popular with even the casual investor who wants to hold on to profit and potentially defer taxes.  Educating the casual investor is the best way to take full advantage of IRS §1031.  The following questions and answers may help to clarify some of the more common misunderstandings.

If I do a 1031 exchange are all taxes deferred?  

This is not really the case.  BOOT is any cash not spent on the purchase of an identified replacement property.  BOOT is taxable regardless of the investor’s adjusted basis on the property.  Boot is subject to all federal tax laws. 

Can I extend the 180-day rule? 

The government is very strict and specific about the 180-day rule.  Like-kind exchanges must be completed within 180 days after the deed transfer date of the relinquished property (or the replacement property in the case of a reverse exchange).   Even if the 180th day falls on the weekend or a holiday.  Waiting until the next “business” day may cause the exchange to fail.

Anyone can act as a qualified intermediary? 

The IRS has created specific requirements on who is able to function as a qualified intermediary (QI)—the entity that holds funds and title to exchanged property.

  • If the exchangor’s attorney or CPA performed services on behalf of the exchangor, within the preceding two years, they may not be allowed to serve as a QI.
  • No real estate agent representing ANY party in the exchange can serve as a QI