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What is a 1031 exchange?

A 1031 exchange is simply a method by which a real property owner disposes of one property and acquires another without having to pay any capital gains tax on the transaction. This method is allowed by Internal Revenue Code Section 1031, whereby owners of certain property may sell such property and not pay any capital gains taxes on such sale if the owner buys certain new property within a specified time period.

Why should i transact a 1031 exchange?

A 1031 exchange allows an investor to defer capital gains tax on a sale of property thereby allowing the investor more money to purchase another property. An investor can diversify by selling one property and acquiring multiple properties or an investor can consolidate by selling multiple hard-to-manage properties and acquire one property.

Who should consider a 1031 exchange?

Anyone who is thinking about selling a business use or investment property should consider effecting a 1031 Exchange. An Exchange offers the astute investor an opportunity to reinvest the federal capital gains that would normally be handed over to the IRS and put that money to work for himself. You work too hard to simply pay the tax without carefully considering this reinvestment option. Essentially, 1031 Exchanges should be thought of as an interest free loan from the IRS; one in which the principal may be increased through subsequent exchanges and may never require repayment, if you plan properly.

How do i get started?

Contact your accommodator to discuss your specific needs, answer any questions that you may have, and review the procedures of conducting a successful 1031 exchange. If you do not already have a accommodator, please contact us and we will assist you in finding one.

What are the basic requirements of exchanges?


Like-kind simply means real property. Like-kind refers to the nature or character, not its grade or quality. Like-kind is a very broad and liberal category where just about any type of investment or business use property would qualify. Properties can be located anywhere within the United States with Exchanges taking place in one or more states. Examples of like-kind: rental properties (single family homes, duplexes, triplexes, apartment buildings and complexes, etc.), raw land, office buildings, shopping centers, businesses, marinas, golf courses, a lease of at least 30 years including options, parking lots, farms, factories, trailer parks, storage facilities, retail stores, and interest in a co-tenancy. Examples of non like-kind: stocks, bonds, notes, interest in a partnership, and personal property. Investors can “mix and match” their properties. For example, an investor can sell a duplex and acquire raw land or sell a parking garage and acquire a multi-unit apartment building and a warehouse.


Your use of both the relinquished property and replacement property must be investment or business use; each for a minimum of one to two years. Properties must not be used for personal use more than 14 days per year or 10% of the actual number of days the property has been rented in a given year. Replacement property cannot be purchased with the intent to sell immediately.


One of the safe harbors of the regulations is the use of an accommodator to facilitate the Exchange. The sale of the relinquished property and the acquisition of the replacement property must “flow” through the accommodator. This is done through direct deeding to avoid duplicate transfer taxes. The accommodator may not be the taxpayer or an agent of the taxpayer (realtor, attorney, tax advisor, banker, accountant, employee, etc.) or lineal descendant of the Exchanger.


The qualified Escrow Agent may not be the taxpayer or an agent of the taxpayer (realtor, attorney, tax advisor, banker, accountant, employee, etc.) or lineal descendant of the Exchanger. The Exchanger must not have access to the sale proceeds of the relinquished property. The Exchanger is entitled to all earnings on the escrow funds. These taxable funds must also be restricted in the same manner as the principle. The Exchanger chooses the Escrow Agent. The Exchanger is entitled to obtain security for his funds.


The 1031 Exchange Agreement is the most important document in the Exchange. It is the document in which the Exchanger gives the accommodator the right to acquire the relinquished property from the Exchanger and convey it to the buyer. It also gives the accommodator the right to acquire the replacement property from the seller and then convey it to the Exchanger.

1031 EXCHANGE AMENDMENT AND ASSIGNMENT FOR THE ROLLOVER OF THE RELINQUISHED PROPERTY. This document assigns the Exchanger’s rights in the Agreement of Sale with the buyer to the accommodator. Serves as written notification to the buyer of the relinquished property of the Exchangers intent to effect a 1031 Exchange and also provides a hold harmless clause to assure the buyer that there are no additional liabilities or costs to him. If a 1031 Exchange Clause is inserted into the Agreement of Sale, this document is unnecessary.

1031 EXCHANGE AMENDMENT AND ASSIGNMENT FOR THE ACQUISITION OF THE IDENTIFIED REPLACEMENT PROPERTY This document assigns the Exchanger’s rights in the Agreement of Sale with the seller to the accommodator. It serves as written notification to the seller of the replacement property of the Exchangers intent to effect a 1031 Exchange and also provides a hold harmless clause to assure the seller that there are no additional liabilities or cost to him. If a 1031 Exchange Clause is inserted into the Agreement of Sale, this document is unnecessary.


The 45-Day Identification Period begins at the closing of the relinquished property and requires the identification of like-kind replacement property. During this 45-Day Identification Period, you may revoke an identification and make a new one. If a like-kind replacement property has not been properly identified to the accommodator by midnight of the 45th day, the Exchange will not work and the taxpayer will be unable to defer the capital gains. The 180-Day Exchange Period runs concurrently with the 45-day Identification Period and requires the acquisition of at least one of the identified replacement properties. If the settlement of the relinquished property occurs between October 16 and December 31 of the current year, the 180-day Exchange Period will be shortened to the income tax deadline of April 15 of the next calendar year unless a timely and proper IRS extension is filed for their return. For a corporation, this filing date is March 15 of the next calendar year unless an IRS extension is filed. Exchange Deadlines Calculator

What properties qualify for a 1031 exchange?

Any property held for productive use in a trade or business or property held for investment purposes can be exchanged for any like-kind property. Property may be real or tangible personal property such as an apartment building, raw land, single family rental, shopping center, 30 year or more leasehold interest or equipment. Like-kind property refers to the nature of the property (i.e. held for use in a business or for investment) not the use of the property – so a shopping center may be exchanged for an apartment building or an apartment building may be exchanged for raw land. Furthermore, one property can be sold and three properties acquired; or four properties can be sold and one acquired.

Is it too late to qualify for a 1031 exchange after i have signed the sales contract?

No, as long as you have not closed on the property you are selling and received the sale proceeds, a 1031 exchange can still be completed. However, once the closing occurs, it is too late to take advantage of Section 1031.

How do i report my 1031 exchange to the irs?

Initially, your 1031 Exchange is reported on the IRS form 1099S which should indicate that you are effecting a 1031 Exchange and will receive property as consideration for the sale of your relinquished property. IRS Form 8824 must be completed as part of your annual federal return. In addition to determining your realized gain, recognized gain and your new basis, this form will ask the date you sold your relinquished property, identified and acquired your replacement property. Form 8824 is actually a supporting form for IRS Form 4797. The income received on rental properties must be reported on Schedule D of Form 1040.

Can you take cash out of a 1031 exchange?

You cannot take cash out of an exchange without creating a taxable event. If an Exchanger elects to take some of the equity out of the sale proceeds in the way of cash or a note, this is called “BOOT” and is taxable. However, to avoid taxable boot, an Exchanger can opt to refinance after the exchange transaction is completed. Capital Gain Tax Calculator.

Will i ever have to pay taxes on the property?

Only when you finally sell the property you exchanged into, without doing another exchange. You can continue to roll over sold properties into new properties without any tax obligation.

How will this effect my estate planning

If you hold the exchanged property until death, your heirs receive a stepped up basis to fair market value, and the capital gain is never taxed. Which means the income taxes that were deferred by you now become permanently tax-free to your heirs.

Is a partially taxable exchange possible?

Yes, you acquire with part of the funds, and you pay taxes on the balance of the funds.

Is it possible to combine an irs 1031 exchange with the universal exclusion?

It is possible to work with both IRS 1031 (1031) and the Universal Exclusion on the same parcel of property. Examples of this (U.E.) would include:

A. A working farm containing the farmer’s residence…the working land would fall under section 1031 rules while the farmers home would fall under the Universal Exclusion.

B. A duplex or similar multi-unit building with one unit owner occupied (U.E.), the balance tenant occupied (1031).

C. A residence (U.E.) containing a home office (1031).

Can i exchange my property for a property in another state?

Yes, anywhere in the U.S.A.

What is a deferred/delayed exchange?

You surrender your relinquished property at one time and acquire the new replacement property, no later than 180 days from the closing of the relinquished property, or the due date for the tax return for the year of the sale, whichever is earlier.

Can i use part of the cash from the transaction for other means and use the remaining proceeds to do a real estate exchange?

Yes, but the cash will be subject to taxation. This is called a partial exchange.

What is the term “trading up?”

It is adding money to an exchange and acquiring an even more expensive piece of property than you sold. Or, you can increase your debt, but you must use all of the proceeds from the relinquished property as well.

Can i acquire more than one piece of property?

You can come out of one relinquished property and acquire any number of replacement properties. As long as the value that you sell is at least the value you purchase, there will not be a taxable event.

Can you direct deed when using an accommodator?

Yes, IRS regulations allow the method known as direct deeding from the grantor to the grantee, as in a typical sale transaction. This procedure eliminates payment of additional transfer taxes. Therefore, in most typical exchanges, the deed is prepared as normal with the title conveyed directly from the seller to the buyer.

What is title insurance?

It is an insurance policy that protects the insured against loss should the condition of title to the land be other than as insured. Unlike other types of insurance that offer protection against future possible occurrences, title insurance offers protection against past occurrences which could result in a claim at a future date. Coverage continues in effect for so long as you have an interest in the covered property. If you should die, the coverage automatically continues for the benefit of your heirs. If you sell your property, giving warranties of title to your buyer, your coverage continues. Likewise, if a buyer gives you a mortgage to finance a purchase of covered property from you, your coverage continues to protect your security interest in the property. Title insurance provides the insured with “peace of mind” in knowing that you are receiving good and marketable title to the real estate you are purchasing.

Why do I need title insurance?

When you buy a home, or any property for that matter, you expect to enjoy certain benefits from ownership…to be able to occupy and use the property as you wish, to be free from debts or obligations not created or agreed to by you, and to be able to freely sell or pledge your property as security for a loan. Title insurance is designed to cover these rights. Without an owner’s title insurance policy, you may not be fully protected against errors in the public records, hidden defects not disclosed by the public records, or mistakes made during the examination of the title of your new property. As a result, you may be held fully accountable for any liens, judgments or claims brought against your new property. However, your owner’s title policy insures that if such an occasion arises, you will be defended, free of charge against all covered claims and paid up to the amount of the policy to settle valid claims.

What is a title search?

A title search is a thorough review or examination of the public records that pertain to real property ownership and the rights/limitations of its use. All documents affecting the subject property are reviewed for accuracy, completeness and proper execution. Once the title search is completed, the results are provided to a title officer who makes a determination as to the insurability of title.

What issues can a title search reveal?

A title search can show any number of title defects, liens, and other encumbrances and restrictions. Among these are unpaid taxes, unsatisfied mortgages, judgments against buyers/sellers and any restrictions or conditions limiting the use of the land.

Are there any issues a title search may not reveal?

Yes. There are some “hidden hazards” that even the most diligent title search may not reveal. For instance, a previous owner could have incorrectly stated his marital status resulting in a possible claim by his legal spouse. Other hidden hazards include fraud, forgery, defective deeds, mental incompetence, confusion due to similar or identical names, and clerical errors in the City/County land records. These defects can arise after you’ve purchased your home and can jeopardize your right to ownership in part or full.

What is a HUD-1 Settlement Statement?

This is a summary of the financial portion of the real estate transaction. The title company or closing agent is required to use the HUD-1 by the Department of Housing & Urban Development on virtually all one-family to four-family residential real estate transactions involving a lender. The statement will list the purchase price, loan amount, closing costs for the buyer and seller, and will show all sums being charged and disbursed to the parties involved. It also clearly summarizes the total amount due from the purchaser.

What types of risks are covered by title insurance?

Standard Coverage addresses such risk as:

  • • Forgery and impersonation
  • Lack of competency, capacity or legal authority of a party
  • Deed not joined in by a necessary party (co-owner, heir, spouse, corporate officer, or business partner)
  • Undisclosed (but recorded) prior mortgage or lien
  • Undisclosed (but recorded) easement or use restriction
  • Erroneous or inadequate legal descriptions
  • Lack of a right of access
  • Deed not properly recorded

Our advanced policy covers all of the above risks plus:

  • Off-record matters, such as claims for adverse possession or prescriptive easement
  • Deed to land with buildings encroaching on land of another incorrect survey
  • Silent (off-record) liens, such as mechanic’s or estate tax liens
  • Pre-existing violations of subdivision laws, zoning ordinances or CC&R’s (Covenants, Conditions and Restrictions)
  • Post-policy forgery
  • Forced removal of improvements due to lack of building permit (subject to deductible)
  • Post-policy construction of improvements by a neighbor onto insured land
  • Location and dimensions of insured land (survey not required)
What does title insurance cost?

The cost varies, depending mainly on the value of your property. The important thing to remember is that you only pay once, then the coverage continues in effect for so long as you have an interest in covered property. If you should die, the coverage automatically continues for the benefit of your heirs. If you sell your property, giving warranties of title to your buyer, your coverage continues. Likewise, if a buyer gives you a mortgage to finance a purchase of covered property from you, your coverage continues to protect your security interest in the property.

If my lender obtains title insurance, why do I need it?

The lender’s policy covers only the amount of its loan, which is usually not the full property value. In the event of an adverse claim, the lender would ordinarily not be concerned unless its loan became non-performing and the claim threatened the lender’s ability to foreclose and recover its principal and interest. And in the event of a claim, there is no provision for payment of legal expenses for an uninsured party. When a loan policy is being issued, the small additional expense of an owner’s policy is a bargain.

If I have a problem, will I lose my property to make a claim?

Not at all. At the mere hint of a claim adverse to your title, you should contact your title insurer or the agent who issued your policy. Title insurance includes coverage for legal expenses that may be necessary to investigate, litigate, or settle an adverse claim.

Should I refinance?

When interest rates fall, a homeowner should certainly explore the possible benefits of refinancing; however, you should discuss your financial situation and goals with your lender before making a final decision. Are you looking to lower your monthly payment? Consolidate debts? Get cash out for a large purchase? Change your interest deduction expense for your taxes? Ask your lender to provide you with a few refinancing scenarios that outline how your loan’s term, monthly payment, and total interest expense will change. After reviewing these scenarios, you’ll have a more clear picture as to whether or not the cost to refinance is worth it for you.

Is there a best time to refinance?

The old rule of thumb is that a person should refinance when mortgage rates drop 2% or more below their current interest rate. However, refinancing may be a viable option even if the difference is less. A modest reduction in the loan rate can still trim your monthly payment. For example, the monthly payment on a $100,000 loan at 8.5% is about $770 (excluding taxes and insurance). If the rate were lowered to 7.5%, the monthly payment would be about $700, or a savings of $70. Again, the significance of such savings is dependent upon your overall financial picture, how long you plan to stay in the home, etc.

Should I refinance if I plan to move soon?

This is an important factor to consider. Most lenders charge fees to refinance a loan. If you plan to stay in your home for less than a few years, there may not be enough time for your monthly savings to outweigh your upfront costs. For example, let’s say your refinance transaction lowered your monthly payment by $50 and the lender charged you $1,000. It will take 20 months ($1,000 divided by $50) for you to recoup the upfront cost before you will begin realizing your savings. Some lenders offer “no cost” loans which come with a slightly higher interest rate but no other costs. The attractiveness of these loans depends on the interest rate you are being charged on your current loan.

Is there anything I need to consider before refinancing?

One factor people don’t always consider is that saving mortgage interest dollars might not always be the best choice for everyone. You have to take a good look at your own “financial personality” here. Remember that mortgage interest is tax deductible. When you reduce your monthly payment, you reduce your tax deduction as well. Are you disciplined enough to invest your newfound monthly savings in such a way that your lessened tax benefit won’t be a problem?

What types of claims or risks covered by title insurance?

This depends but, in general, costs might include a lender application fee, an origination fee (typically 1% of the loan amount), administrative fees, title insurance company costs (settlement fee, title search, title insurance premium, handling/service fees, recording fees paid to the Clerk of the Court). Your new lender will disclose their fees to you on a Good Faith Estimate, which is usually done at the time of application or soon after.

The sum of all charges could amount to 2-3% of the loan amount. If you don’t have the available cash to cover the associated loan costs, you might want to look for lenders offering “no-cost” loans. There will be a slightly higher interest rate associated with such a loan, so discuss the pros and cons with your lender.

In addition, if you have a prior First American Owner’s Policy which is less than five years old, you qualify for a 40% discount on the title insurance. You will need to provide us with a copy of the policy.

What are points?

Points are costs that need to be paid to a lender in order to receive mortgage financing under specified terms. One point is equal to one percent of the loan amount. In other words, one point on a $100,000 loan would be $1,000. Discount points are fees that are used to lower the interest rate on a mortgage loan. Some people may choose to pay one or more points to the lender upfront in exchange for a lower interest rate. The choice is personal and dependent upon one’s financial situation, how long one plans to be in the home, etc.

What will the title company need from me?
  • Information about your property (address, etc.)
  • Name, phone number, and account numbers for all open mortgages
  • Social Security Numbers for all owners
  • Name and phone number for the new lender
  • Copy of prior First American Owner’s Policy, if less than five years old
When should I contact the title company to arrange my closing?

Contact them as soon as you are reasonably sure of loan approval and agreement of terms with your lender. You should inform your lender at the time of application (or shortly thereafter) who you have chosen to conduct your closing. You may be required to place a nonrefundable deposit with the title company to cover expenses, which will be applied to costs at the time of closing. It is advisable to contact the title company at least two weeks prior to closing.

Why do I need to have another title search done?

Each lender requires that a Commitment to Insure be issued in their favor prior to closing. The information in that Commitment can only be obtained from a review and evaluation of documents in the local land records. Therefore, the title company must research these records for each transaction. This gives them and the lender a proper picture of all existing liens and encumbrances as well as accurate ownership and real estate tax and assessment information.

I already have title insurance. Why do I have to buy it again?

When you purchased your home, you probably paid for Owner’s and Lender’s Title Insurance Policies. Your Owner’s Policy will remain in force and effect; however, when the existing loan is paid off at the time of refinancing, a new Lender’s Policy must be issued.

What will happen at the closing?

Normally, you will come to the title company’s office to sign all of the new loan papers. You will have to show proper identification since many of these are legal documents which require a Notary Public’s acknowledgment. The lender will have prepared and delivered to the title company all of the paperwork pertaining to your new loan. You will sign many of the same documents and forms that you signed when you originally purchased your home.