Frequently Asked Questions

Q1:  Can I sell a primary residence and use 1031 to avoid tax?

A1:  No.  1031 is limited to investment and business property.  However, Internal Revenue Code Section 121 allows homeowners to avoid tax on $250,000 ($500,000 for married taxpayers) when a primary residence is sold. 

Q2:  Can Section 1031 be used for sales other than real estate?

A2:  Yes, tangible business property such as construction equipment, vehicles, machinery or furniture can qualify, but the replacement property must be in the same asset category.

Q3:  What about stocks?  Can I sell Ford stock and replace it with Chrysler stock? 

A3:  No.

Q4:  What should I do if I don’t want to buy real estate with my sale proceeds?

A4:  It is possible to buy a fractional interest in real estate, known as a Tenancy In Common (TIC), as a replacement.  The TIC investment avoids management and other direct ownership disadvantages.

Q5:  If I have a mortgage on the property being sold, how much do I need to invest in replacement property to avoid tax?

A5:  There is considerable confusion on this question.  It is necessary to reinvest the entire proceeds in order to avoid tax.  For example, if the sale price of the relinquished property is $1 million, replacement property for $1 million must be purchased to completely eliminate tax liability.  If the property sold is mortgaged for $500,000 and only $500,000 of cash is generated at the closing, the seller still must spend at least $1 million on replacement property(ies) which means a mortgage must be taken on the replacement or funds from other sources must be found.

Q6:  What is the most frequent cause for 1031 Exchanges to fail?

A6:  Failure to locate suitable replacement property is the biggest cause for failure.  Most sellers are able to identify replacement property within 45 days, but frequently, the 180 day replacement period expires before a closing can be arranged.  Failure to arrange financing, zoning, soil problems, title defects and other problems are among other causes for failed Like Kind Exchanges. 

Q7:  What happens if a replacement is not purchased? 

A7:  The transaction is taxed.

Q8:  How much gain is taxed if only part of the proceeds is reinvested?

A8:  Whatever is not reinvested is taxed.

Q9:  Are there any restrictions on the type of real estate that qualifies for replacement?

A9:  Any real estate anywhere in the USA qualifies.  Fractional interests qualify, multiple properties are eligible, but foreign property is not allowed. 

Q10:  What options are available if the property being sold is owned by a corporation or partnership?