What is a Qualified Intermediary (QI)?

A Qualified Intermediary, or QI, is an unrelated third party used to facilitate the 1031 exchange transaction.

What type of property qualifies for a 1031 exchange?

Any property held for productive use in a trade or business or for investment can be exchange for like-kind property. "Like-kind" refers to the nature of the investment. Any type of real property can be exchanged for another type of real property. For example: A single family rental can be exchanged for a duplex. Raw land can be exchanged for a shopping center or an office space for apartments. Any combination will work. This gives the investor flexibility to change investment strategies to fulfill their portfolio needs.

What type of property does NOT qualify?

Personal residences, developed lots, home flipping, partnership interests, and property intended for immediate resale after acquisition typically do not meet the criteria. The eligibility of second homes is subjective and hinges on their use and how they are reported for income tax purposes.

How long do I need to own my investment property before I can exchange it for another?

While there is no specific timeline specified, it is advisable to possess it for a minimum duration of 12 months to prevent any potential complications.

What happens if I don't close on my replacement property within 180 days?

In this case, you would need to pay the capital gain taxes as if you sold the property without a 1031 exchange.

Can I do an exchange with more than one property?

Yes, you are allowed to exchange multiple properties. You can relinquish multiple properties for one replacement property, or vice-versa you can exchange one relinquished property for multiple replacement properties. The key is you want your replacement property(ies) to be equal or greater in value than your relinquished property(ies) to avoid taxable boot.

Does the name of the title for my replacement property matter?

Yes, with few exceptions, the title to the replacement property must be in the same name, or entity, as the relinquished property was held.

Can I refinance the relinquished property prior to the exchange or the replacement property after the exchange?

While there is nothing in the regulations on this question, for technical reasons it is considered bad practice to refinance in anticipation of entering an exchange. Refinancing after an exchange to pull some equity out is considered proper.

How much notice do I need to do a 1031 Exchange?

You can do a 1031 exchange any time before closing on the sale of your investment property. 

Am I allowed to use exchange funds for improvements on replacement property?

Yes, as long as your exchange is structured properly. The best method to accomplish this is to have a Special Purpose Entity acquire title to the replacement property, the Special Purpose Entity will complete the improvements and then you, as the exchanger, will acquire the replacement property from the Special Purpose Entity through a built-to-suit or improvement exchange.

What is a reverse exchange?

A reverse exchange is an exchange where the replacement property is purchased before the relinquished property is sold. Reverse Exchanges are more complex and your QI should be involved in all steps and planning to ensure it is completed in accordance with IRC § 1031.

Can some of the members of an LLC do their own exchange or cash out at the time of the sale of the property?

The IRS Code does not allow members/partners to do his or her own exchange, only the entity can do so. Given enough preplanning, there is a technique referred to as a “drop & swap” whereby certain members/partners can drop their interest from the entity and enter the exchange individually and not at a member/partner.

In a reverse exchange, since the accommodator will be in title, does that mean it collects the rent from the property tenants?

No, typically, the Accommodator will Master Lease the property to the taxpayer enabling the taxpayer to manage the property, collect the rent and pay for expenses.