Investment property
1031 Exchange in Sacramento: The Sale, the Purchase and the Loan
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What Is a 1031 Exchange?
General information, not tax, legal or investment advice.
A 1031 exchange lets an owner sell investment or business real estate and buy other real estate without recognizing the gain in that year, if the IRS rules are met. The name comes from section 1031 of the Internal Revenue Code. The tax is deferred, not erased.
According to the IRS Instructions for Form 8824, for 2018 and later years section 1031 applies only to exchanges of real property. That property must be held for use in a trade or business or for investment. The IRS also says section 1031 doesn't apply to real property held primarily for sale, such as a home bought to flip. A home used solely as your personal residence doesn't qualify either.
The property you sell is called the relinquished property. The one you buy is the replacement property. Both sides of the exchange have to be planned together, and that's where most of the work is.
Talk about your property
What Are the 45-Day and 180-Day Deadlines?
There are two clocks, and both start the day you transfer the property you're giving up.
- 45 days to identify. The IRS says the replacement property must be identified within 45 days after the relinquished property is transferred. The identification is made in writing and delivered as the rules require.
- 180 days to receive. The replacement property must be received within 180 days, or by the due date of your tax return for that year, whichever comes first. A sale late in the year can run into the return due date unless the return is extended.
These deadlines are strict. A missed date can make the gain taxable in the year of the sale. That's why we plan the search for the replacement property before the first property is listed, not after it closes.
Exchanges between related parties have their own rules. The IRS says gain may be recognized if either party disposes of the exchanged property within 2 years of the last transfer. Your tax advisor reviews this before you start.
Why Do You Need a Qualified Intermediary?
In a deferred exchange, you generally can't touch the sale money. A qualified intermediary, often called a QI, holds the proceeds from the sale and uses them to buy the replacement property. The IRS Form 8824 instructions describe this arrangement as the way a deferred exchange is treated as a like-kind exchange.
The QI is set up before the sale closes, and escrow on both properties works with them. Cash taken out of the exchange can create a taxable amount, and so can some other changes between the two properties. Your CPA or tax attorney tells you how much of the gain is deferred and what, if anything, is taxed now.
We don't act as your intermediary and we don't give tax advice. We make sure the sale, the purchase and the deadlines line up with your QI's instructions.
How Does One Team Handle the Sale and the Purchase?
A 1031 exchange is two transactions on one calendar. When different people handle each side, the timing is where things slip. At Surroundings, one team handles both.
- Before you list: we price the relinquished property from recent sales. We talk through what you want the replacement to do, and we start looking before the 45-day clock begins.
- The sale: we prepare, market and sell the property, and we write the exchange into the contract the way your QI asks.
- The search: we tour and analyze replacement properties so you can identify on time with real choices.
- The purchase: we write the offer around your exchange dates and keep both escrows on the same schedule.
Maggie B. Hopkins is a broker with 23 years in real estate and lending combined. If you are shopping for the replacement, our page on buying investment property covers how we run the numbers on a rental.
What Is a Delaware Statutory Trust?
A Delaware Statutory Trust, or DST, is one possible replacement option for some exchanges. Instead of buying a property you manage yourself, you buy a fractional interest in a trust that owns real estate. The IRS addressed this structure in Revenue Ruling 2004-86. That ruling describes when an interest in a DST can count as replacement real property under section 1031.
DSTs are passive. The trust's manager runs the property, and investors don't make decisions about it. That appeals to some owners who are tired of tenants and repairs. It also means you give up control. DST interests are generally hard to sell before the trust ends, and like any investment they carry risk.
DST interests are generally sold as securities. Surroundings doesn't sell DSTs and doesn't give securities, tax or legal advice.
When a DST may belong in the conversation, call Maggie at (916) 549-3131 for a referral to a trusted 1031 and DST specialist. We handle the real estate sale. You and your own licensed advisors decide whether a DST fits.
Can You Finance the Replacement Property?
Yes. Many exchanges involve a loan on the replacement property. Maggie is a mortgage broker, so she can arrange financing on the replacement and shop it across a network of approved lenders. Give yourself options. Get a quote from us and compare it with anyone.
Financing an investment property has its own rules. Lenders usually ask for a larger down payment and more cash in reserve than on a home you'll live in. Timing matters even more in an exchange, so the loan is planned alongside the 45-day and 180-day dates. Our page on purchase loans covers the basics. Approval always depends on underwriting.
You're free to use any lender you like. Call Maggie's loan line at (916) 549-3131 to talk through the loan.
Where Should You Start?
Start before you list. Bring us the property you're thinking of selling, what you paid and roughly when, and what you want the next property to do for you. Bring your CPA or tax attorney into the conversation early, along with the QI you plan to use.
Contact us to talk about your property. We'll lay out the sale, the search and the financing on one calendar so the deadlines are visible from day one.
Frequently Asked Questions
What is the 45-day rule in a 1031 exchange?
You must identify the replacement property in writing within 45 days after you transfer the property you're giving up. The IRS sets this deadline, and it is strict.
How long do I have to close on the replacement property?
The replacement must be received within 180 days after you transfer the relinquished property, or by your tax return due date for that year if that comes first. Your tax advisor confirms your exact dates.
Can I do a 1031 exchange on my primary home?
No. The IRS says a home used solely as your personal residence doesn't qualify. Section 1031 covers real property held for business or investment use.
Do I need a qualified intermediary?
For a deferred exchange, generally yes. The qualified intermediary holds the sale proceeds so you don't receive them, then uses them to buy the replacement property. Your tax advisor helps you choose one.
Is a Delaware Statutory Trust a good replacement property?
It depends on your situation, and that's a question for licensed professionals. A DST is a passive, fractional interest in real estate that is generally sold as a security. For a referral to a trusted 1031 and DST specialist, call Maggie at (916) 549-3131.
Can Surroundings give me tax advice on my exchange?
No. We handle the real estate and, if you choose, the financing. Your CPA or tax attorney advises on the tax side, and your qualified intermediary handles the exchange paperwork.
Can I get a loan on the replacement property?
Often, yes, subject to underwriting. Maggie is a mortgage broker and can shop replacement financing across a network of approved lenders. Call (916) 549-3131, or use any lender you choose.