RENT Magazine Q3 '24

Many housing providers own rental properties via a trust. Here we will review the different categories of trusts, and what impact they might have on 1031 exchanges. To successfully conduct an IRS-compliant tax-deferred exchange under IRC §1031, all taxpayers must follow a handful of simple rules: UNDERSTANDING TRUSTS AND 1031 EXCHANGES

• A Qualified Intermediary (aka an Exchange Accommodator) must receive, hold and re-invest the transaction funds on behalf of the taxpayer.

• To avoid paying any capital gains tax, one must replace the entire value of relinquished property (i.e., both equity and debt).

• After closing the sale of a relinquished property, a taxpayer has 45 days to identify replacement candidates, and 180 days to close the 1031-exchange purchase.

• On the “identification letter,” one must identify up to three or more properties of any value, provided their total value does not exceed 200% of the relinquished property value.

• All taxpayers should avoid buying 1031-exchange replacement property from a related party.

• Only rental and business property, acquired with the intent to hold for an indefinite period, will qualify for tax deferral under a 1031 exchange.

All of these rules apply regardless of the taxpayer’s ownership entity, but the ownership structure may affect one’s strategy, timing or replacement options.

PAGE 38

Powered by