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Know the rules, timeline, when doing a 1031 exchange

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Wednesday, March 23, 2011

A 1031 exchange can have its advantages, but you need know the rules and adhere to the given timeline. Work with a qualified real estate professional, consult a tax advisor, and ask questions before making the exchange, a panel of experts advised members of the Silicon Valley Association of REALTORS®. The panel included certified exchange specialists Larry Laidlaw, with Starker Services, Inc.; Leonard Spoto, with Asset Exchange Co.; and Ron Ricard, with IPX 1031.

A 1031 exchange, also known as a tax deferred exchange, is a method for selling one property that's qualified, and acquiring another qualified "like kind" property within a specific time frame. This transaction is treated as an exchange and not just as a simple sale. It is this difference between "exchanging" and not simply buying and selling which allows a taxpayer to qualify for a deferred gain treatment.

The panel stressed sellers need to be aware of the tax implications and ask questions before selling their property, especially if the property has dropped in value. Ricard said he often gets questions about a transaction after the fact, when it is too late to do anything about it.
There could be a capital gain exposure even if a seller has lost money on the property he sold. "You may have a capital gain on a property even in a short sale, even when refinancing," according to Ricard.

When completing a 1031 exchange, it is critical to adhere to the specified timelines. In a 1031 exchange, sellers can defer paying capital gains taxes on the sale of a property if, within 45 days of closing, they identify a replacement property and are able to close on that property within 180 days from the original sale.

Laidlaw said the buyer can identify up to three potential replacements (3-property rule) of equal or greater value, and then the buyer has another 135 days to complete the purchase. "You don't have to be under contract; you just have to have the street address and identify these properties," said Laidlaw.

The panel does not recommend buying a short sale as an exchange because it is highly unlikely a short sale transaction can be completed within the given timeline.

Leonard said in the past, 45 percent of homeowners who completed 1031 exchanges bought homes out of state for cash flow reasons. These days, 85 to 90 percent of those doing such transactions are buying in California for the very same reasons. Properties purchased include small single-family rentals, small apartment buildings and some commercial property located inland and in the Sacramento area.


The Silicon Valley Association of REALTORS® (SILVAR) is a professional trade organization representing over 4,000 REALTORS® and Affiliate members engaged in the real estate business on the Peninsula and in the South Bay. SILVAR promotes the highest ethical standards of real estate practice, serves as an advocate for homeownership and homeowners, and represents the interests of property owners in Silicon Valley.

The term "REALTOR®" is a registered collective membership mark which identifies a real estate professional who is a member of the National Association of REALTORS® and who subscribes to its strict Code of Ethics.

Variations of this article have appeared in local area newspapers.

For further information, please contact Rose Meily at SILVAR Public Affairs, email , or phone (408) 200-0109.

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