Both personal and real properties can be considered the qualified properties for a 1031 tax-deferred exchange. A property, which s held for productive use in a business/trade or for investment purpose is eligible for exchange.
But, there are some property types that are not qualified for the exchange. These types include:
• Certificates of trust
• Notes, bonds, or stocks
• Interests in a partnership of a limited liability company with multiple members.
Replacement property, which an individual plans to acquire, should be a like-kind to the property that is being relinquished. Like-kind refers to the properties that are similar in character or nature, regardless of the difference in quality or grade. Every real property can be considered like-kind. The factors like improvement or interest do not decide whether a property is like-kind. This means you can exchange a land with a building for a raw land. An investor can also exchange a single property for multiple ones. A personal property is not like-kind to a real property.
If you have a limited budget, you can consider Delaware Statutory Trust (DST) as an option for 1031 tax-deferred exchange. The DST investments can be considered like-kind to a real property.
We, at FAI Exchange, can help locate suitable DST properties that can be used to defer capital gains taxes. You can also connect with us to find a Qualified Intermediary for the exchange.
When we talk about a 1031 tax exchange, four major properties participate in the exchange: the taxpayer, the intermediary, the buyer, and the seller. Apart from these, the advisors and real estate agents offer their support services during the exchange. Let’s check the roles of the major participants in an exchange.
He/she is the central character of an exchange process. Also known as the exchanger, the taxpayer is someone who possesses the property and wants to exchange it to defer the taxes. He needs to follow certain sets of rules to get success in his/her endeavor of saving the tax.
A buyer is an individual who’s interested in acquiring the property of the taxpayer. The property is known as relinquished property. And it is the capital gain on this property for which the taxpayer defers the taxes.
A seller is someone who’s the owner of the property that the taxpayer wishes to buy. The property that the seller owns is referred to as replacement property in 1031 exchange.
A qualified intermediary, or a QI, is a party that holds the money after the property has been sold by the taxpayer. A QA uses this money to buy replacement property from the seller. There are some other major roles of QA, like ensuring the process complies with regulations. it also coordinates the documents required for the exchange.
As discussed above, the advisers and real estate agents also play a key role in this process. And, we at FAI Exchange, help the taxpayers by helping them find replacement property in a 1031 exchange.