The IRS requires the exchange to be in kind, and it identifies that as real estate for real estate. You can exchange a duplex for bare land, office building, warehouse, or whatever, just so long as it’s real estate. You can exchange one property for ten properties; the numbers on either side of the exchange don’t matter, just so long as the properties are not used as primary or secondary residences. From the date of closing on the sale of the relinquished property, you have 45 days to find the replacement property(ies), and 180 days to close.
You must insert a clause into all sale contracts that identify the transactions as a 1031 exchange. The IRS needs to see an easy-to-follow paper trail.
John and Angie went the exchange route when they decided they no longer wanted the demands of being a landlord. They owned a duplex that had about $80,000 equity and didn’t want to pay out a big part of their equity in taxes. Although they didn’t want to exchange it for more rental property, undeveloped land appeared to be a good way to go—low maintenance, no rent to collect, or late-night plumbing problems to fix.
Finding a buyer for their duplex was easy, and the sale closed with the proceeds going into escrow. Their realtor found a 10-acre parcel for sale that appeared to be in the path of eventual development. Since the land cost $139,000, John and Angie needed about $59,000 to make a deal. They decided to take out a 10-year, low interest equity line of credit on their home for the funds needed to complete the deal. The second leg of the 1031 exchange closed, and everyone was happy.
As a result of the exchange, a young couple starting out was able to buy a duplex they had been searching for. John and Angie didn’t have to collect rents or do maintenance on their day off anymore. Everyone won, and the tax man had to wait for another day to collect his due.
For more information on 1031 exchanges go to www.firstamex.com.
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