1031 Exchange Basics
If the Relinquished Property (the property you are selling) is in escrow, immediately contact an Exchange Accommodator. Once escrow closes, unless appropriate measures were taken, you will be disqualified from conducting an exchange.
The properties involved in an exchange must be held for productive use in trade, business, or for investment purposes. A personal home can be converted to qualify, but it is a lengthy process and should be discussed with a qualified professional early on.
The Identification Period begins upon the close of escrow of the Relinquished Property. All potential replacement properties must be unambiguously identified in signed writing by midnight on the 45th day. The replacement property (or properties) must be acquired on or before midnight of the 180th day of the exchange. NO EXCEPTIONS.
The 3 Property Rule
The 3 Property Rule allows for identification of up to three U.S. properties, without regard to fair market value of the properties.
The 200% Rule
The 200% Rule allows for identification of four or more properties as long as the combined value of all properties identified does not exceed 200% of the fair market value of the Relinquished Property.
To defer all capital gains tax, an Exchangor must reinvest 100% of the sales price of the Relinquished Property in a property (or properties) of equal or greater value. This means that if the property was mortgaged, the Exchangor will have to come up with the cash for the difference or will need to obtain another mortgage to reach the sales price.
What If I Don’t Want To Invest All of The Cash?
If an exchange is otherwise in compliance with all relevant I.R.S. guidelines, only the portion of cash received by the Exchangor will be subject to taxes. The tax consequence occurs the year the cash was received.
Timeline 180 Day Rule
Day one of the exchange begins on the date of close of escrow on the Relinquished Property. An exchange client must complete purchase of the Replacement Property by day 180. The only exception is a presidentially declared federal disaster that specifically extends this timeline.
2018 Tax Updates
State and local tax deductions are capped at $10,000
Previously, taxpayers could deduct payments made to state and local property, income, and sales taxes from their federal returns. The new law caps these deductions—which can be any combination of property, income, and sales taxes at $10,000.
Mortgage interest deductions
The new law caps the limit on deductible mortgage debt at $750,000 for loans taken out after Dec. 14, 2017. Loans made before that date can continue to deduct interest on mortgage debt up to $1 million.
Primary residence capital gains exclusion
Home sellers can exclude up to $500,000 for joint filers or $250,000 for single filers from capital gains when selling a primary home as long as the homeowner has lived in the residence for two of the past five years. An earlier proposal would have increased that requirement to five out of the last eight years but it was struck down.
Deduction for casualty losses
The law restricts the deduction to only losses attributable to a presidentially declared disaster.
The law eliminates the deduction for all individuals except for members of the military.
The law doubles the estate tax exemption to $11.2 million.