1031 Exchanges

Such a valuable tool, and an integral part of how we make sense of selling California income property during one’s lifetime, the 1031 Exchange deserves its own page.

Many savvy real estate investors have accelerated their capital growth through 1031 Exchanges (i.e. tax deferred exchanges).  Simply stated, IRS tax code 1031 enables the investor to sell an income property (the ‘down-leg’ or ‘relinquished property’) and defer any capital gains tax event, by reinvesting the down-leg sale proceeds into a “like-kind property” (‘up-leg’ or ‘exchange property’), within the specified timeframes and guidelines of IRC Section 1031.

When helping our clients to facilitate a 1031 exchange(s), Palma agents remain steadfast about optimally solidifying the down-leg sale, while getting an early start on sourcing ideal up-leg purchase opportunities, searching high and low until successful completion, so to maximize the positive effect of the 1031 exchange for our clients, and inspire long-term client relations.

Salient IRC 1031 guidelines include the following:

  • Establishment of 1031 Exchange Account occurs with the assistance of an ‘Accomodator’ or ‘Qualified Intermediary’. There are several nationally recognized title and escrow companies that have divisions dedicated to this, as, well as regional independent firms that specialize in this service.  It is imperative that the exchange account established prior to the close of escrow of the ’down-leg’.
  • Identification Period is the time the investor has to identify their preferred up-leg or exchange property(ies). The investor/taxpayer has Forty Five (45) Days from the date that the relinquished or down-leg property closes, to identify their targeted up-leg property(ies).
  • Manner of Identification is by way of a duly executed, written document signed by the investor and submitted to the Qualified Intermediary, which properly addresses the property(ies) being considered for acquisition.
  • 3 Property Rule limits the amount of properties an investor/taxpayer can identify. Under this option, the investor can identify up to a maximum of three (3) properties, and must close escrow on one or more of the specifically named properties, or fail to complete the exchange in the eyes of the IRS.
  • 200% Rule allows the investor/taxpayer to identify more than three properties. Under this option, the taxpayer can identify as many properties as they choose, as long as the total fair market value of what they identify is not greater than 200% of the fair market value of the down-leg/relinquished property.
  • Period for Acquisition of Up-leg/Exchange Property, is the amount of time that the investor/taxpayer has to complete the acquisition of the up-leg property(ies), starting from the date that the down-leg/relinquished property closes escrow, which is One Hundred and Eighty (180) Days.
  • Price of the up-leg property(ies) must be equal to or greater than the price (minus costs of sale) of the down-leg property, in order to avoid ‘taxable boot’, or capital gains tax consequences for any such amount below this threshold.
  • The balance of any Debt against the down-leg property, must be replaced by an equal or greater amount of debt against the up-leg property(ies), or risk incurring taxable boot for any difference.
  • Reverse Exchange has several important nuances to consider, but generally speaking, it allows the investor/taxpayer to first acquire their up-leg property(ies) through their accommodator/qualified intermediary, and then sell their down-leg property(ies) after. This is helpful for buyers who can pay All Cash, and have very specific preferences for their up-leg property(ies), which are often more difficult to find than to sell their down-leg property(ies) at fair market value.