Common Ways to Ruin your 1031 Exchange

Some rules in the 1031 Exchange are very grey, but there are some hard and fast rules to which you must adhere. Here are a few things you DO NOT want to do in your 1031 Exchange:

1. Forget to set up your 1031 Exchange before closing

Section 1031 requires that a taxpayer selling property hire a Qualified Intermediary (like Security 1st Exchange) before the transfer of the property that is being sold. As QI, we must prepare an Exchange Agreement and an Assignment Agreement for the property being sold and those documents must be executed before the closing of the relinquished property. As long as that is done, the exchange is in place. This meets the “safe harbor” requirements of Section 1031.

But, you would be amazed at how many taxpayers do not realize that the exchange cannot be set up after the closing. We frequently get calls from a taxpayer that forgot to set up their exchange before closing or someone told them they did not have to do it.

As a safeguard, always call your tax professional or our team here at Security 1st Exchange before your sale closes to make sure an exchange is necessary.

2. Including Personal Property in your Exchange

The 1031 Exchange only allows for the deferral of taxes on the sale of real property. If you are selling personal property as well, the value of the personal property cannot be exchanged.

When purchasing your replacement property, the exchange funds can only be used for real property. If there is some component of personal property, the 1031 funds being held by your QI cannot be used for that portion.

3. Missing your 1031 timeframes

The 1031 Exchange must generally adhere to the following timeframes, which begin from the date of transfer of your relinquished property:

• 45 calendar days to identify replacement property

• 180 calendar days to close on your replacement property

We will provide you with these timeframes, but is up to you as the taxpayer to complete the tasks within the timeframes listed. On occasion, a taxpayer forgets to identify within the 45 days, even with reminders from us. Make sure you coordinate with your tax professional and your Realtor to have everything done within the 45 and 180 days.

As a Qualified Intermediary, we can never give a taxpayer specific tax advice as we would not be filing your taxes at the end of the year. That role will be filled by your tax professional. We strongly encourage that you speak with your own tax person if you are considering a situation like the one described above.

For more information, please reach out to your tax professional for specific questions or contact the specialists here at Security 1st Exchange for assistance.