Frequently Asked Questions About a 1031 Exchange

Have questions about a 1031 exchange? If so, you aren’t alone. A 1031 exchange can be tricky to navigate, which is why we want to create a 1031 exchange FAQ to answer your questions.

What Is a 1031 Exchange?
One of the most common questions about 1031 exchange is: what is it? A 1031 exchange is an exchange permitted under the revenue law that states someone may exchange (buy and sell) one commercial activity or asset for another of similar or equal value, without realization of the tax liability.

What Are The Specifics Of a 1031 Exchange?
The exchange must be a bona fide exchange and not a counter-sale. The tax rules governing exchanges permit only so much of the profit or loss to be kept by the exporter. The rules are based on the principle that the more similar or equal to the service or asset is to the taxpayer,s original investment, the lesser should be the amount of tax that has to be paid.

What Are The Exporter’s Responsibilities?
This is another common question in 1031 exchange FAQ. The exporter is charged with three basic responsibilities. They must prepare the necessary documents and comply with tax law requirements. The exporter also must not participate in the transaction. The exporter will be charged an additional tax on the cost of transporting the goods overseas. The third duty is not to induce or to encourage any person to arrange or attempt to arrange for the transportation of the goods through the 1031 exchange.

Who Else Is involved?
Who are the parties that need to be involved in the purchase, sale or lease of the foreign real estate or property? Whom do you trust to carry out the process of exchange? The name of the foreign official that is designated as the dominant agent should always be followed. This is the person who serves as the representative of the government. Is there a difference between a vacation property and investment property? Yes, there is a huge difference. Investment property is available for sale or rent. Vacation homes and other residential real property can only be owned for personal use. A vacation homeowner is not eligible to exchange his property under the 1031 exchange if he intends to sell it for personal use.

Does the sale of a replacement property affect the status of the original contract? Absolutely! If the sale is of a replacement property and the amount realized from the exchange exceeds the price of the original contract then the investor may be required to repay the difference, known as depreciation, to the government authorities. A 1031 exchange can be tricky to navigate, and it’s completely normal to have questions about it. The key is to ensure all parties in this process know what’s going on, what their responsibilities are, and what they need to do to complete the deal. Hopefully, this article answered some of your questions, but if you need more information, you can always seek additional professional consultation.