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Navigating Tax Opportunities in 1031 Exchanges | Part I

Feb 21, 2024
Gregory M. Malone
William Exeter

The Basics of 1031 Exchanges

This webinar details the basics of 1031 exchanges, including forward and reverse 1031 exchanges, diving into different 1031 exchange concepts, and the key players involved in 1031 exchanges. 

What is a 1031 Exchange? 

Since being codified in 1954, 1031 exchanges have undergone many changes, but the core of how it functions has remained the same. Ultimately, a 1031 exchange is meant to allow real estate investors to swap one investment or business use property for another and defer capital gains taxes.

There are both federal and state level tax benefits that you should consider when leveraging 1031 exchanges. 

Defining Real Property Trade or Business 

Real property is defined as a parcel of land and the structures attached to it. Real property is generally “like-kind” regardless of whether it’s been improved or remains unimproved property. Like-Kind property is required to qualify for the tax deferred exchange and includes a variety of real estate options including residential, commercial, industrial and a host of others.  

Identification Requirements for 1031 Exchanges 

In a forward exchange, the identification period provides the taxpayer with 45 days from the time of sale to identify potential like-kind replacement properties the taxpayer is looking to purchase. There are three different rules that allow the taxpayer to meet the identification requirements. 

Three Property Rule 

The three property rule provides a limitation on the number of properties that you can identify, up to three, but does not put a limitation on the value of those properties. This rule would allow you to pick three properties that have a significantly higher value than what you have sold.

200% Fair Market Value Rule 

The 200% fair market value rule allows you to identify as many properties as you choose but puts a limitation on the FMV of those properties combined at 200% of the sales price of your relinquished property or properties. This rule essentially is the reverse of the previous rule allowing for a higher number of properties but limiting the overall value.

95% Exception Rule 

If you cannot meet the previous two rules than you have one last exception whereby the taxpayer must acquire 95% or more of the fair market value of all properties identified.

Identification Period for 1031 Exchanges 

The identification period begins the minute that you sell your first property or purchase your first property in a reverse exchange. From that time, you have 45 days to identify properties that you are looking to purchase or sell and you have 180 days total to complete all purchase and sale transactions required for your exchange.

Partial 1031 Exchanges 

A partial 1031 exchange is when you trade down in value and realize some of the tax consequences. For example, assume the net sale price is $3.8 million and you only reinvest $3 million. This means you would be trading down by $800,000. That $800,000 would all be considered taxable gain in the year of sale. The other $3 million would be tax deferred and reduce the basis of any purchased properties.

Strategies and Practical Examples 

1031 exchanges can be a complicated topic and there are many individual nuances to consider. Watch the full on-demand webinar above to hear real world examples and practical strategies for completing a 1031 exchange. 

If you’re ready to discuss your personal situation, contact us with the form below. 


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Gregory M. Malone

Greg Malone is Partner in the firm. With nearly 20 years of experience in public accounting, Greg works extensively with closely held businesses specializing in significant real estate holdings.

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