Considering a 1031 Exchange?
Talk to a Professional

1031 FAQs

Frequently Asked Questions

Q:

Is this legal? Does the IRS know about this?

A:

Yes. Section 1031 is part of the Internal Revenue Code. Section 1031 has been around for decades and the use of 1031 exchanges has been approved by courts and set forth in Treasury Regulations.

Q:

Can I buy before I sell?

A:

If structured correctly – yes. In such a situation Burns 1031 can establish an LLC to be an “Exchange Accommodation Titleholder” to hold the property for up to 180 days while you sell your property. This is a reverse exchange.

Q:

Can I use sale proceeds to pay down debt on a property I already own and still qualify under 1031?

A:

No. That is exchanging real property for debt relief. Exchanges must be “like kind” – in most cases, real property for real property.

Q:

Can I use money held for a 1031 to improve my acquisition property?

A:

If structured correctly – yes. This is an “improvement exchange,” and Burns 1031 can hold title through an LLC and pay for improvements that are to be performed within 180 days of acquisition.

Q:

Do I need to do a 1031 when selling my residence?

A:

No. A primary residence is not investment or commercial use and does not qualify. Besides, if you meet requirement including owning the residence 2 out of the last 5 years, and residing there 2 out of the last 5 years, you likely have $250,000 per person/$500,000 per married couple exclusion from recognizing gain.

Q:

Can I use 1031 funds to pay down a mortgage on another property I own?

A:

No. That is not like kind.

Q:

Can I use 1031 funds to build on a property I own?

A:

Generally not. Taking proceeds of real estate and exchanges for boards, nails, cement, etc. is not like kind. It must be real estate for real estate.

Q:

What if I have to purchase my replacement property first?

A:

Reverse exchanges are possible wherein Burns 1031 would purchase through an LLC and hold the property up to 180 days as an exchange accommodation stakeholder. Reverse exchanges can be difficult and Burns 1031 can discuss if it can work for you.

Q:

Can I use 1031 funds to improve the replacement property?

A:

Yes, if structured correctly. Burns 1031 would take title and fund improvements through exchange funds and later convey the improved property to you. Improvement exchanges can be difficult, so call Burns 1031 early to discuss.

Q:

How long do I have to rent out the replacement property before I can move in?

A:

The IRS has refused to set a hard and fast timeline as each person's situation is different. Your intent at the purchase of the relinquished property needs to be that it is for investment or commercial use. The longer period it is so held, the better. Informal guidance points to two years generally being acceptable.

Q:

I have a property in an LLC with a friend. If we sell it, can I do an exchange with my half of the sale?

A:

Perhaps. It would be best that the property be moved out of the LLC so that you hold it personally (or in a different single member, disregarded entity LLC) as a tenant-in-common. This way you are selling real estate as opposed to trying to exchange your share of a partnership which is not like kind with real estate.

Q:

I've already closed escrow and just learned of the ability to exchange. Can I still do a 1031?

A:

No. You already have taken receipt of the funds and recognized the gain. It is important to line up the exchange well prior to closing your sale.