1031 Exchange Information

One of the most powerful tools available to real estate investors is the Section 1031 exchange.  Using this excellent option helps those selling appreciated farm, business or investment property to defer taxes and preserve equity.  When working with these transactions it helps to have a 1031 Exchange Broker/Agent who is familiar with the process.

Although the Section 1031 has been around since 1921 it wasn't until 1970 that the code was really challenged by a family named the Starker's.  As a result of the legal action brought by the family, the code now allows for delayed exchanges which are sometimes called "Starkers" after the family name. 

In 1984 Congress approved the Tax Reform Act (TRA) which provided more consistent guidlines for delayed exchanges and then in 1991 further clarified those rules.  It is from those changes that the Safe Harbor Rules emerged and is the area in which Qualified Intermediaries (QI) now operate.  In order to execute a legal Section 1031 exchange you must hire a QI to handle the transction.  There are four basic rules to determine if your property qualifies for a Section 1031 exchange:

  1. Property must be held for investment or productive use in trade or business.
  2. Property must be exchanged for like-kind property.
  3. Replacement properties must be identified within 45 days after the relinquished property is transferred.
  4. The exchange must be completed (replacement property received) by the earlier of 180 days or the tax return due date.

Another advantageous change in the tax law governing Section 1031 exchanges was inacted on March 10, 2008.  In Rev. Proc. 2008-16 the Internal Revenue Service has created rules for allowing the Section 1031 exchange of a vacation or second home.  The change creates a "Safe Harbor" bright line test for qualifying, specifically:

  1. You must have owned the property for 24 months before the exchange.
  2. You must have rented it at fair market value for at least 14 days during the two 12 month periods.
  3. Used it personally for less than 14 days or 10% of the rental period (whichever is greater).

The 1031 exchange has become the tool of choice for investors wishing to preserve capital and free up "tax locked" property. Anyone considering completing an exchange should consult with their tax and legal advisors to ensure this in the right strategy to fit your business or investment objectives.  In addition contracting with a reputable QI is a must in completing the transaction.  There are several large national and regional QI's such as Investment Property Exchange Services (IPX 1031) or NCS Exchange Professionals who are well versed in taking clients through the process.  If you are selling property and considering doing a 1031 exchange then contact us and we'd be happy to assist you as your 1031 Exchange Broker/Agent here in Jackson Hole.

Contact Chip Marvin for more information about 1031 exchanges in Jackson Hole.