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Real Estate Done Right
IRS 1031 tax code allows a property owner to exchange their existing real estate for real estate of a similar value while deferring the taxable capital gains for the sale. Caprock Farm and Ranch Realty facilitates 1031 exchanges all over the country. With our network of 1031 Qualified Intermediaries we help our clients complete a smooth 1031 exchange (and reverse 1031 exchanges).
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The 1031 exchange is a process that investors use to defer capital gains taxes on the sale of a property. Capital gain taxes on any property is the amount of tax a seller pays on the appreciation between the initial purchase and final sale prices.​ Capital gains tax rates vary by state, but a seller could end up paying up to 35% of their final sale price in capital gains taxes if they aren't careful. This can come to a fairly significant amount of money depending on the size of the sale, so naturally, the 1031 exchange begins to appeal to landowners when they see how much money they may be losing to capital gains taxes.
The 1031 exchange allows an investor to defer the capital gains tax through the purchase of a similar property, known as a "replacement property," thereby turning that money that would've been paid in capital gains taxes into more real estate.
Basic Guidelines
​Property must be like-kind, nearly all real estate is like-kind to other real estate.
Property cannot be a personal primary residence or vacation home.
The same taxpayer who sells must also purchase.
The 1031 Exchange needs to be disclosed to both the buyer of the relinquished property and the seller of the replacement property.
The exchange period could be shorter than 180 days if the individuals' tax return is due prior to the 180th day. If that is the case, an extension on filing the tax return would be necessary.
The exchange period could be shorter than 180 days if the individuals' tax return is due prior to the 180th day. If that is the case, an extension on filing the tax return would be necessary.
Identifying replacement property rules
​The Three-Property, 200%, and 95% Rules These rules only apply when a taxpayer identifies replacement properties. If the taxpayer is able to purchase all replacement properties within the 45-day clock time period, these rules do not apply. Some taxpayers will sell one relinquished property and purchase one replacement property—this is easy. However, if a taxpayer has multiple properties to sell, the taxpayer may sell these relinquished properties in separate transactions, doing a tax-free exchange for each relinquished property. The taxpayer may also sell multiple properties and combine them into one tax-free exchange. Timing is critical on this. Some taxpayers will sell multiple relinquished properties all as part of the same 1031 exchange. The taxpayer may purchase any number and any total value of replacement properties as long as the purchases close within the 45 days after the sale of the first relinquished properties. If you need additional time to close the purchase of the replacement properties and obtain the time by identifying, the following rules apply. Regardless of the number of relinquished properties involved, the taxpayer must meet one of the three alternative rules.
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Alternative 1: The Three-Property Rule If you identify no more than three properties, the replacement properties may be of any value, individually or collectively. It is important to keep this in mind if the taxpayer has already closed on one or two replacement properties but runs out of time. Properties acquired during the 45-day period count toward the three-property rule and limit how many properties should be identified.
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Alternative 2: The 200% Rule If the taxpayer identifies more properties than allowed by the three-property rule, the total value of all purchased replacement properties may not exceed 200% of the total sales price of all relinquished properties. Properties acquired during the 45-day period count toward the 200% rule requirement and limit the value of properties identified. (If audited, the taxpayer needs a contract or appraisal to prove this.)
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Alternative 3: The 95% Rule If the taxpayer identifies more properties than allowed by the three-property rule and the 200% rule has been exceeded, the taxpayer must purchase, by the end of the exchange period, enough replacement properties to equal at least 95% of the fair market value of the identified replacement properties. This limits the taxpayer's ability to identify a large list of potential replacement properties and close on those most convenient. Properties acquired during the identification period (45 days) count toward the 95% rule and limit the number of properties that should be identified.