Identify when a §1031 exchange might not benefit your client

Your clients rely on you to help them navigate complex real estate transactions, and few are trickier than exchanges under §1031. Knowing how to identify qualifying property, calculate accurate gain and basis, and properly report transactions can make all the difference in your client relationships.

Below, you’ll find a few of the top questions from a recent webinar on the topic and their corresponding answers. If you choose to watch the on-demand version of this webinar, you can access the full recording and the entire list of Q&As.    

Q: What is a like-kind exchange under §1031?

A: A like-kind exchange, also called a §1031 exchange, allows taxpayers to defer paying capital gains tax on the sale of a business or investment property if the proceeds are reinvested in a similar (like-kind) property. Like-kind refers to the nature or character of the property, not its grade or quality. For example, exchanging a residential rental property for a commercial retail building qualifies, even though the properties serve different functions.

Q: What are the key deadlines for a §1031 exchange?

A: There are two major deadlines: the replacement property must be identified within 45 days of the sale of the relinquished property, and the purchase of the replacement property must be completed within 180 days of the sale.

Q: Can a taxpayer do a partial §1031 exchange?

A: Yes. If a taxpayer does not reinvest all proceeds or replaces it with a property of lesser value, they may have a partially tax-deferred exchange and pay tax on the difference, known as boot.

Q: What is boot in a §1031 exchange?

A: Boot is the non-like-kind property received in the exchange. It can be cash, debt relief or other non-qualified property. Common examples include receiving cash at closing, debt reduction on the replacement property not offset by new debt or having the buyer assume the seller’s mortgage. Items such as prorated rents, repair credits and certain closing costs may also be considered boot if they result in a financial benefit to the taxpayer.

To learn more about reporting for §1031 like-kind exchange, you can watch our on-demand webinar. NATP members can attend for free, depending on membership level! If you’re not an NATP member and want to learn more, join our completely free 30-day trial.