{"id":6436,"date":"2026-05-01T09:07:34","date_gmt":"2026-05-01T09:07:34","guid":{"rendered":"https:\/\/www.acobloom.com\/us\/?p=6436"},"modified":"2026-05-01T09:19:50","modified_gmt":"2026-05-01T09:19:50","slug":"real-estate-profitability-accounting-services","status":"publish","type":"post","link":"https:\/\/www.acobloom.com\/us\/blog\/real-estate-profitability-accounting-services\/","title":{"rendered":"Guide to\u00a01031 Exchange for Real Estate Investors\u00a0"},"content":{"rendered":"\n<p>Tax-saving strategies for real estate investors tend to revolve around deferment of payment deadlines. They essentially involve leveraging deadlines, which postpone taxes on capital gains. Section 1031 is one such tax-deferred strategy that works on a \u2018like-kind\u2019 exchange of property investments. It works best when investors are in the phase of continuous portfolio growth and are planning to leverage current property for higher-value real estate.<\/p>\n\n\n\n<p>While the exchange comes with a list of advantages, being simple to understand for new investors is&nbsp;definitely&nbsp;not&nbsp;one of them.&nbsp;This is&nbsp;down to&nbsp;the 1031 exchange code&nbsp;which&nbsp;is associated with strict deadlines and stringent property requirements.&nbsp;Understanding the ins and outs of this&nbsp;exchange is necessary&nbsp;to&nbsp;leverage&nbsp;its benefits.&nbsp;Having&nbsp;<a href=\"https:\/\/www.acobloom.com\/us\/blog\/real-estate-profitability-accounting\/\" target=\"_blank\" rel=\"noreferrer noopener\"><strong>real estate profitability&nbsp;accounting<\/strong><\/a>&nbsp;will provide&nbsp;the&nbsp;much-needed&nbsp;insights&nbsp;into&nbsp;internal&nbsp;workings&nbsp;and&nbsp;regulatory requirements&nbsp;that&nbsp;investors&nbsp;must adhere to.&nbsp;<\/p>\n\n\n\n<p>To&nbsp;navigate&nbsp;the complexities of 1031 exchange, this blog&nbsp;takes a&nbsp;deep dive to give investors a&nbsp;headstart&nbsp;on&nbsp;their multi-property investment journey.&nbsp;<\/p>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_50 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\">Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\" role=\"button\"><label for=\"item-69f60d2de1831\" aria-hidden=\"true\"><span style=\"display: flex;align-items: center;width: 35px;height: 30px;justify-content: center;direction:ltr;\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/label><input  type=\"checkbox\" id=\"item-69f60d2de1831\"><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/www.acobloom.com\/us\/blog\/real-estate-profitability-accounting-services\/#What_is_1031_Exchange\" title=\"What is&nbsp;1031&nbsp;Exchange?&nbsp;\">What is&nbsp;1031&nbsp;Exchange?&nbsp;<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/www.acobloom.com\/us\/blog\/real-estate-profitability-accounting-services\/#What_Qualifies_as_%E2%80%9CLink-Kind%E2%80%9D_Property\" title=\"What&nbsp;Qualifies as \u201cLink-Kind\u201d Property?&nbsp;\">What&nbsp;Qualifies as \u201cLink-Kind\u201d Property?&nbsp;<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/www.acobloom.com\/us\/blog\/real-estate-profitability-accounting-services\/#Strengthen_Your_Business_with\" title=\"\n        Strengthen Your Business with\n      \">\n        Strengthen Your Business with\n      <\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/www.acobloom.com\/us\/blog\/real-estate-profitability-accounting-services\/#Expert_Accounting_Services\" title=\"\n        Expert Accounting Services\n        \">\n        Expert Accounting Services\n        <\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/www.acobloom.com\/us\/blog\/real-estate-profitability-accounting-services\/#How_does_a_1031_Exchange_Work_as_a_Tax-deferred_Strategy_for_Real_Estate_Investors\" title=\"How does a 1031 Exchange Work as a Tax-deferred Strategy for Real Estate Investors&nbsp;\">How does a 1031 Exchange Work as a Tax-deferred Strategy for Real Estate Investors&nbsp;<\/a><ul class='ez-toc-list-level-3'><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/www.acobloom.com\/us\/blog\/real-estate-profitability-accounting-services\/#Establish_the_Exchange\" title=\"Establish the Exchange&nbsp;\">Establish the Exchange&nbsp;<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/www.acobloom.com\/us\/blog\/real-estate-profitability-accounting-services\/#Sell_the_Property\" title=\"Sell the Property&nbsp;\">Sell the Property&nbsp;<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/www.acobloom.com\/us\/blog\/real-estate-profitability-accounting-services\/#Identify_Replacement_Property\" title=\"Identify&nbsp;Replacement Property&nbsp;\">Identify&nbsp;Replacement Property&nbsp;<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/www.acobloom.com\/us\/blog\/real-estate-profitability-accounting-services\/#Identify_Rules\" title=\"Identify&nbsp;Rules&nbsp;\">Identify&nbsp;Rules&nbsp;<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-10\" href=\"https:\/\/www.acobloom.com\/us\/blog\/real-estate-profitability-accounting-services\/#Purchase_New_Property\" title=\"Purchase New Property&nbsp;\">Purchase New Property&nbsp;<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-11\" href=\"https:\/\/www.acobloom.com\/us\/blog\/real-estate-profitability-accounting-services\/#Close_the_Transaction\" title=\"Close the Transaction&nbsp;\">Close the Transaction&nbsp;<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-12\" href=\"https:\/\/www.acobloom.com\/us\/blog\/real-estate-profitability-accounting-services\/#Common_Pitfalls_to_Avoid_around_1031_Exchange\" title=\"Common Pitfalls to Avoid around 1031 Exchange&nbsp;\">Common Pitfalls to Avoid around 1031 Exchange&nbsp;<\/a><ul class='ez-toc-list-level-3'><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-13\" href=\"https:\/\/www.acobloom.com\/us\/blog\/real-estate-profitability-accounting-services\/#Missing_Critical_Deadlines\" title=\"Missing Critical Deadlines&nbsp;\">Missing Critical Deadlines&nbsp;<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-14\" href=\"https:\/\/www.acobloom.com\/us\/blog\/real-estate-profitability-accounting-services\/#Not_Using_a_Qualified_Intermediary_QI_On_Time\" title=\"Not Using a Qualified Intermediary (QI)&nbsp;On Time&nbsp;\">Not Using a Qualified Intermediary (QI)&nbsp;On Time&nbsp;<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-15\" href=\"https:\/\/www.acobloom.com\/us\/blog\/real-estate-profitability-accounting-services\/#Creating_Taxable_%E2%80%9CBoot%E2%80%9D\" title=\"Creating Taxable &#8220;Boot&#8221;&nbsp;\">Creating Taxable &#8220;Boot&#8221;&nbsp;<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-16\" href=\"https:\/\/www.acobloom.com\/us\/blog\/real-estate-profitability-accounting-services\/#The_%E2%80%9CSame_Taxpayer%E2%80%9D_Rule_Violation\" title=\"The &#8220;Same Taxpayer&#8221; Rule Violation&nbsp;\">The &#8220;Same Taxpayer&#8221; Rule Violation&nbsp;<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-17\" href=\"https:\/\/www.acobloom.com\/us\/blog\/real-estate-profitability-accounting-services\/#Misidentifying_Properties\" title=\"Misidentifying Properties&nbsp;&nbsp;\">Misidentifying Properties&nbsp;&nbsp;<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-18\" href=\"https:\/\/www.acobloom.com\/us\/blog\/real-estate-profitability-accounting-services\/#Related_Party_Restrictions\" title=\"Related Party Restrictions&nbsp;\">Related Party Restrictions&nbsp;<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-19\" href=\"https:\/\/www.acobloom.com\/us\/blog\/real-estate-profitability-accounting-services\/#Not_Identifying_Enough_Property\" title=\"Not Identifying Enough Property&nbsp;\">Not Identifying Enough Property&nbsp;<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-20\" href=\"https:\/\/www.acobloom.com\/us\/blog\/real-estate-profitability-accounting-services\/#Misinterpreting_%E2%80%9CLike-Kind%E2%80%9D\" title=\"Misinterpreting &#8220;Like-Kind&#8221;&nbsp;\">Misinterpreting &#8220;Like-Kind&#8221;&nbsp;<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-21\" href=\"https:\/\/www.acobloom.com\/us\/blog\/real-estate-profitability-accounting-services\/#Key_Takeaways\" title=\"Key Takeaways&nbsp;\">Key Takeaways&nbsp;<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_is_1031_Exchange\"><\/span>What is&nbsp;1031&nbsp;Exchange?&nbsp;<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The 1031 exchange, named after&nbsp;IRS&nbsp;section 1031, allows deferring taxes on capital gains from selling investments or business real estate. An investor can defer paying taxes by rolling over their&nbsp;gains into another property. Through such an exchange, an investor&nbsp;is able to&nbsp;defer taxes, fully reinvest their equity, and increase their holdings. There is no limit to the number of exchanges an investor can undertake&nbsp;with&nbsp;<strong>1031 exchange taxes<\/strong>.&nbsp;To pull this exchange off, there are a few basic components that an investor must collect:&nbsp;<\/p>\n\n\n\n<p><strong>Like-Kind Property<\/strong>: In a \u201clike-kind\u201d exchange, the property to be swapped must be of the same kind of asset. For example, if one wishes to swap their apartment block, they must consider&nbsp;the receiving&nbsp;property, which must be of the same kind, either an apartment block or an investment property.&nbsp;<\/p>\n\n\n\n<p><strong>A Qualified Intermediary<\/strong>: A neutral third party is needed to hold the funds to prevent the seller from being considered to have &#8216;constructive receipt&#8217; of the cash. This legal idea suggests that the seller is viewed as having received the money, which could trigger tax obligations. By using an impartial third party to hold the funds, the seller avoids this perceived receipt, aiding in the management and&nbsp;possible reduction&nbsp;of tax liabilities.&nbsp;<\/p>\n\n\n\n<p><strong>Investment Use<\/strong>: Both properties being&nbsp;sold,&nbsp;and those&nbsp;acquired&nbsp;should be held with the purpose of productive use, such as in trade, business, or investment. This&nbsp;indicates&nbsp;that properties should not only be kept for personal reasons or non-commercial use but rather as assets that help generate income or support continuous business operations.&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_Qualifies_as_%E2%80%9CLink-Kind%E2%80%9D_Property\"><\/span>What&nbsp;Qualifies as \u201cLink-Kind\u201d Property?&nbsp;<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Under 1031 Exchange,&nbsp;properties must be listed&nbsp;as&nbsp;qualified. The list&nbsp;below&nbsp;includes qualitied and non-qualified property types.&nbsp;However, the key distinction is in the intent and usage of said property.&nbsp;&nbsp;<\/p>\n\n\n\n<figure class=\"wp-block-table\"><table class=\"has-fixed-layout\"><thead><tr><th><strong>Qualified Property Types (Eligible)<\/strong>&nbsp;<\/th><th><strong>Non-Qualified Property Types (Not Eligible)<\/strong>&nbsp;<\/th><\/tr><\/thead><tbody><tr><td>Property held for investment purposes, such as rental units&nbsp;<\/td><td>Primary residences (personal homes)&nbsp;<\/td><\/tr><tr><td>Commercial properties (office buildings, retail spaces)&nbsp;<\/td><td>Property primarily&nbsp;acquired&nbsp;for resale, such as fix-and-flip inventory&nbsp;<\/td><\/tr><tr><td>Industrial properties (warehouses, manufacturing units)&nbsp;<\/td><td>Stocks, bonds, or securities&nbsp;<\/td><\/tr><tr><td>Land held for investment or appreciation&nbsp;<\/td><td>Partnership interests&nbsp;<\/td><\/tr><tr><td>Multi-family residential rental properties&nbsp;<\/td><td>Foreign real estate (not like-kind to U.S. property)&nbsp;<\/td><\/tr><tr><td>Leasehold interests (30+ years&nbsp;remaining)&nbsp;<\/td><td>Personal-use property (vacation homes with limited rental use)&nbsp;<\/td><\/tr><tr><td>Agricultural or farmland used for business\/investment&nbsp;<\/td><td>REIT shares or real estate funds&nbsp;<\/td><\/tr><tr><td>Mixed-use properties (portion&nbsp;used for investment)&nbsp;<\/td><td>Intangible assets (IP, goodwill)&nbsp;<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<section class=\"market-entry-cta\" style=\"padding-bottom:30px;\">\n  <div class=\"container\">\n    <div class=\"cta-box text-center text-white px-4\">\n\n      <!-- Background Pattern -->\n      <span class=\"pattern-circle\"><\/span>\n      <span class=\"pattern-circle bottom\"><\/span>\n      <span class=\"pattern-square\"><\/span>\n\n      <!-- Heading -->\n      <h2 class=\"fw-bold mb-3\"><span class=\"ez-toc-section\" id=\"Strengthen_Your_Business_with\"><\/span>\n        Strengthen Your Business with\n      <span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n      <!-- Sub Heading + Button -->\n      <div class=\"d-flex justify-content-center align-items-center flex-wrap gap-3\">\n        <h2 class=\"fw-bold mb-0\"><span class=\"ez-toc-section\" id=\"Expert_Accounting_Services\"><\/span>\n        Expert Accounting Services\n        <span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n        <a href=\"https:\/\/www.acobloom.com\/us\/contact-us\/\" target=\"_blank\" class=\"btn cta-btn\">\n         Get Started Today &nbsp; <span>\u2197<\/span>\n        <\/a>\n      <\/div>\n\n      <!-- Badges -->\n      <div class=\"cta-features d-flex justify-content-center gap-4 mt-4 flex-wrap\">\n        <span>\n          <i class=\"bi bi-check-circle-fill\"><\/i>\n        Gain Accurate Financial Insights \n        <\/span>\n\n        <span>\n          <i class=\"bi bi-check-circle-fill\"><\/i>\n         Save Time And Make Smarter Business Decisions\n        <\/span>\n      <\/div>\n\n    <\/div>\n  <\/div>\n<\/section>\n\n\n\n\n<style>\n\t\n\/* ===== Market Entry CTA Section ===== *\/\n\n.market-entry-cta {\n  padding-bottom: 30px;\n}\n\n\/* CTA Box *\/\n.market-entry-cta .cta-box {\n  position: relative;\n  background: #293C8D;\n  border-radius: 24px;\n  overflow: hidden;\n  padding: 40px;\n  color: #fff;\n}\n\n@media (max-width: 767px) {\n  .market-entry-cta .cta-box {\n    padding: 20px;\n  }\n}\n\n\/* Ensure text stays above patterns *\/\n.market-entry-cta .cta-box * {\n  position: relative;\n  z-index: 1;\n    gap: 20px;\n   color: white;\n\n}\n\n\/* ===== Background Patterns ===== *\/\n\n\/* Pattern Circles *\/\n.market-entry-cta .pattern-circle {\n  position: absolute;\n  width: 300px;\n  height: 300px;\n  background: rgba(255, 255, 255, 0.08);\n  border-radius: 50%;\n  top: -120px;\n  left: -120px;\n  z-index: 0;\n}\n\n.market-entry-cta .pattern-circle.bottom {\n  top: auto;\n  left: auto;\n  bottom: -120px;\n  right: -120px;\n}\n\n\/* Pattern Square *\/\n.market-entry-cta .pattern-square {\n  position: absolute;\n  width: 180px;\n  height: 180px;\n  background: rgba(255, 255, 255, 0.05);\n  top: 30px;\n  right: 60px;\n  border-radius: 20px;\n  z-index: 0;\n}\n\n\/* ===== CTA Button ===== *\/\n\n.market-entry-cta .cta-btn {\n  background: #ffffff;\n  color: #000;\n  border-radius: 50px;\n  padding: 10px 22px;\n  font-weight: 500;\n  border: none;\n  transition: all 0.3s ease;\n}\n\n.market-entry-cta .cta-btn:hover {\n  background: #f1f1f1;\n  color: #000;\n}\n\n@media (max-width: 767px) {\n  .market-entry-cta .cta-btn {\n    font-size: 11px;\n  }\n}\n\n\/* ===== Features \/ Badges ===== *\/\n\n.market-entry-cta .cta-features span {\n  font-size: 14px;\n  opacity: 0.9;\n  display: flex;\n  align-items: center;\n  gap: 6px;\n    font-weight: 400;\n}\n\n@media (max-width: 767px) {\n  .market-entry-cta .cta-features {\n    gap: 0 !important;\n  }\n}\n\n<\/style>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"How_does_a_1031_Exchange_Work_as_a_Tax-deferred_Strategy_for_Real_Estate_Investors\"><\/span>How does a 1031 Exchange Work as a Tax-deferred Strategy for Real Estate Investors&nbsp;<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The step-by-step process of using the 1031 exchange is what makes it one of the most opted for tax deferring&nbsp;strategies. It&nbsp;essentially encapsulates&nbsp;a two-way transaction that is categorized as one. The following section encapsulates what this transaction can look like, typically:&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Establish_the_Exchange\"><\/span>Establish the Exchange&nbsp;<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Prior to selling the &#8216;relinquished&#8217; property, it is crucial to provide a specific clause in the contract showing that this transaction is done through a&nbsp;<strong>1031&nbsp;exchange&nbsp;IRS<\/strong>&nbsp;exchange. The investor must hire a Qualified Intermediary to handle the exchange, as IRS rules prevent the investor from accessing the funds between selling the old property and buying the new one.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Sell_the_Property\"><\/span>Sell the Property&nbsp;<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Once the contract has been signed, the next step for the investor is to sell their first real estate, known as the &#8220;relinquished property.&#8221;&nbsp;In order to&nbsp;defer taxes on the transaction, the sale proceeds need to go into escrow with the Qualified Intermediary, and any cash or benefit that goes directly to the seller will be termed as &#8220;boot&#8221; and taxed accordingly.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Identify_Replacement_Property\"><\/span>Identify&nbsp;Replacement Property&nbsp;<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Once the relinquished property is sold by the investor, he has exactly&nbsp;45 days&nbsp;within which to look for potential replacement properties. Such identifications should always be in writing, signed, and&nbsp;submitted&nbsp;to the QI. Failure to meet this time limit will automatically end the whole transaction, making capital gains taxable.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Identify_Rules\"><\/span>Identify&nbsp;Rules&nbsp;<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>In&nbsp;determining&nbsp;eligible properties, it is important that&nbsp;<strong>1031 exchange investors<\/strong>&nbsp;adhere to certain IRS regulations, either the 3-property rule or the 200% rule. In terms of the 3-property rule, this allows for up to three properties of whatever dollar amount. The 200% rule allows investors to&nbsp;identify&nbsp;unlimited properties&nbsp;as long as&nbsp;their total&nbsp;fair market value&nbsp;doesn&#8217;t&nbsp;exceed twice the sold property&#8217;s value.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Purchase_New_Property\"><\/span>Purchase New Property&nbsp;<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>The replacement property must be bought within&nbsp;180 days&nbsp;of the sale, or by the tax filing deadline for that year, whichever comes first. This is the same period during which the identification period occurs.&nbsp;The new property normally has to cost at least as much as the old one.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Close_the_Transaction\"><\/span>Close the Transaction&nbsp;<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>In completing the exchange, the Qualified Intermediary (QI) uses the funds they are holding to&nbsp;acquire&nbsp;the new replacement property. The title for this new property is then transferred to the investor. Since the QI acted as the intermediary, the IRS views this process as a single, tax-deferred exchange rather than a taxable sale followed by a purchase.&nbsp;&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Common_Pitfalls_to_Avoid_around_1031_Exchange\"><\/span>Common Pitfalls to Avoid around 1031 Exchange&nbsp;<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Some common mistakes made during a 1031 exchange occur due to the strict deadlines for the transaction set by the IRS. Some of these mistakes include missing the deadline for&nbsp;identifying&nbsp;property, constructive receipt of money, not using all the money, and altering the structure of ownership of the business.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Missing_Critical_Deadlines\"><\/span>Missing Critical Deadlines&nbsp;<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>The identification period of&nbsp;45 days&nbsp;and the closing period of&nbsp;180 days&nbsp;are stringent time limits, calculated in terms of calendar days and not business days. The 45-day period begins the day following the sale of the relinquished property, and the identification of&nbsp;possible replacement&nbsp;property should be done by midnight of the 45th day.&nbsp;<\/p>\n\n\n\n<p>The 180-day period is the total period allowed for buying the new property. It occurs concurrently with the 45-day period and does not begin&nbsp;immediately&nbsp;following it. Not meeting any of these two periods, even by one day, regardless of the reason for the delay,&nbsp;renders&nbsp;the exchange void and taxable&nbsp;immediately. The only exception is when there is a federally declared disaster, which may allow extensions.<\/p>\n\n\n\n<figure class=\"wp-block-table\"><table class=\"has-fixed-layout\"><thead><tr><th><strong>Deadline Type&nbsp;<\/strong>&nbsp;<\/th><th><strong>Timeframe<\/strong>&nbsp;<\/th><th><strong>Start Date<\/strong>&nbsp;<\/th><th><strong>End Date<\/strong>&nbsp;<\/th><th><strong>Consequences of Missing<\/strong>&nbsp;<\/th><\/tr><\/thead><tbody><tr><td>Identification Period&nbsp;<\/td><td>45 Calendar Days&nbsp;<\/td><td>Day after sale of relinquished property&nbsp;<\/td><td>Midnight on 45th day&nbsp;<\/td><td>Exchange fails; transaction becomes taxable.&nbsp;<\/td><\/tr><tr><td>Exchange Period&nbsp;<\/td><td>180 Calendar Days&nbsp;<\/td><td>Day after sale of relinquished property&nbsp;<\/td><td>Midnight on 180th day&nbsp;<\/td><td>Exchange fails; transaction becomes taxable.&nbsp;<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Not_Using_a_Qualified_Intermediary_QI_On_Time\"><\/span>Not Using a Qualified Intermediary (QI)&nbsp;On Time&nbsp;<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>It is&nbsp;important for&nbsp;there to be an agreement between the QI and the investor before the transfer of the relinquished property occurs. A Qualified Intermediary will structure the exchange, buy the relinquished property, and keep all the sale proceeds to ensure that the taxpayer does not actually or constructively receive the money from the transaction. Constructive receipt happens when the money is deposited into the taxpayer\u2019s personal bank account or when he or she has control over the money.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Creating_Taxable_%E2%80%9CBoot%E2%80%9D\"><\/span>Creating Taxable &#8220;Boot&#8221;&nbsp;<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>To defer all capital gains taxes completely, the investor must reinvest the entire net proceeds from the sale of the relinquished property into a new replacement property. If cash is taken out at closing or if the amount of debt on the new property is less than on the old one, this results in &#8220;boot.&#8221;&nbsp;Boot&nbsp;can take the form of cash (cash boot) or debt reduction (mortgage boot). Any boot received is taxable in the year the exchange is&nbsp;finalized. Although receiving&nbsp;boot&nbsp;doesn&#8217;t&nbsp;disqualify the exchange entirely, it makes it partly taxable, thereby reducing the overall tax advantages.&nbsp;&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"The_%E2%80%9CSame_Taxpayer%E2%80%9D_Rule_Violation\"><\/span>The &#8220;Same Taxpayer&#8221; Rule Violation&nbsp;<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>The 1031 Same Taxpayer provision mandates that both parties selling and&nbsp;purchasing&nbsp;the replacement property be the same. In other words, if a person owns a property, and a newly created LLC buys the replacement property, there is a change in ownership between the two properties. This is a breach of the &#8220;same taxpayer&#8221; provision since changing ownership during the transaction normally causes the sale to become taxable.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Misidentifying_Properties\"><\/span>Misidentifying Properties&nbsp;&nbsp;<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>There are specific identification rules that taxpayers&nbsp;are required to&nbsp;abide by within&nbsp;45 days. The rule includes something called the \u201c3-property rule,\u201d which allows taxpayers to&nbsp;identify&nbsp;up to three properties, irrespective of market value. Another rule called the \u201c200% rule\u201d enables the taxpayer to&nbsp;identify&nbsp;any number of properties&nbsp;as long as&nbsp;they&nbsp;don\u2019t&nbsp;exceed 200 percent of the market value of the property being sold. In case there is an excess breach without meeting the 95% rule, it will be considered a failure and will result in tax.&nbsp;<\/p>\n\n\n\n<figure class=\"wp-block-table\"><table class=\"has-fixed-layout\"><thead><tr><th><strong>Identification Rule&nbsp;<\/strong>&nbsp;<\/th><th><strong>Description<\/strong>&nbsp;<\/th><th><strong>Limitation<\/strong>&nbsp;<\/th><\/tr><\/thead><tbody><tr><td>3-Property Rule&nbsp;<\/td><td>Identify&nbsp;up to 3 properties of any value.&nbsp;<\/td><td>Total&nbsp;number of properties cannot exceed 3.&nbsp;<\/td><\/tr><tr><td>200% Rule&nbsp;<\/td><td>Identify&nbsp;any number of properties.&nbsp;<\/td><td>Total Fair Market Value (FMV) cannot exceed 200% of the relinquished property value.&nbsp;<\/td><\/tr><tr><td>95% Rule&nbsp;<\/td><td>Identify&nbsp;any number\/value of properties.&nbsp;<\/td><td>Must actually acquire at least 95% of the total value of identified properties.&nbsp;<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Related_Party_Restrictions\"><\/span>Related Party Restrictions&nbsp;<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Although it is allowed for taxpayers to engage in dealings with related parties, the IRS ensures that these types of deals are highly scrutinized as a means of curbing tax abuse through basis shifting. According to the Internal Revenue Service, both the taxpayer and the related party must have held their respective properties for two years since the exchange occurred. If either one of the parties decides to dispose of the asset prior to the end of the two years, then the exchange will not qualify as a 1031 transaction.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Not_Identifying_Enough_Property\"><\/span>Not Identifying Enough Property&nbsp;<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>The reliance of a taxpayer on only one replacement property in an area where there is stiff competition comes with many hazards; for example, in the case of a failure to pass inspection or appraisal, everything will be jeopardized. It would be wise for the taxpayer to take advantage of the&nbsp;45 days&nbsp;given to find some other properties in case things&nbsp;don\u2019t&nbsp;work out well with the first one.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Misinterpreting_%E2%80%9CLike-Kind%E2%80%9D\"><\/span>Misinterpreting &#8220;Like-Kind&#8221;&nbsp;<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>This property replacement should be put to business use or be made for an&nbsp;investment and&nbsp;not be used personally.&nbsp;While the term &#8220;like-kind&#8221; may have a wide application, which can allow the exchange of vacant land for an apartment complex, &#8220;fix-and-flip&#8221; properties whose main&nbsp;objective&nbsp;is fast sale do not fall under this category. Property that has been&nbsp;designated&nbsp;as a principal residence or is primarily used as a vacation home without rental activity cannot make use of the 1031 tax deferral provisions.&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Key_Takeaways\"><\/span>Key Takeaways&nbsp;<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>As&nbsp;indicated&nbsp;in the blog post above, IRS 1031 exchange rules provide&nbsp;excellent&nbsp;tax-saving strategies&nbsp;that&nbsp;allow&nbsp;investors&nbsp;seeking to defer taxes. The blog encapsulates the major requirements for conducting a successful 1031 exchange. Moreover, the pitfalls that may occur during the exchange have been outlined in the article, thus providing valuable information on how to navigate this process successfully without committing errors.&nbsp;<\/p>\n\n\n\n<p>By leveraging&nbsp;AcoBloom\u2019s&nbsp;tax&nbsp;expertise, investors can&nbsp;leverage&nbsp;more customized tax-efficient strategies to maximize profits and minimize potential losses. We help our clients use the IRS 1031 exchange regulations and find other ways to save on taxes. Therefore, by working together with us, investors&nbsp;acquire&nbsp;the ability to navigate tax season&nbsp;optimized&nbsp;for&nbsp;maximum&nbsp;savings.&nbsp;<\/p>\n\n\n\n<p><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Tax-saving strategies for real estate investors tend to revolve around deferment of payment deadlines. They essentially involve leveraging deadlines, which postpone taxes on capital gains. Section 1031 is one such tax-deferred strategy that works on a \u2018like-kind\u2019 exchange of property investments. It works best when investors are in the phase of continuous portfolio growth and [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":6439,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[28],"tags":[],"class_list":["post-6436","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-accounting"],"_links":{"self":[{"href":"https:\/\/www.acobloom.com\/us\/wp-json\/wp\/v2\/posts\/6436","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.acobloom.com\/us\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.acobloom.com\/us\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.acobloom.com\/us\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.acobloom.com\/us\/wp-json\/wp\/v2\/comments?post=6436"}],"version-history":[{"count":5,"href":"https:\/\/www.acobloom.com\/us\/wp-json\/wp\/v2\/posts\/6436\/revisions"}],"predecessor-version":[{"id":6442,"href":"https:\/\/www.acobloom.com\/us\/wp-json\/wp\/v2\/posts\/6436\/revisions\/6442"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.acobloom.com\/us\/wp-json\/wp\/v2\/media\/6439"}],"wp:attachment":[{"href":"https:\/\/www.acobloom.com\/us\/wp-json\/wp\/v2\/media?parent=6436"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.acobloom.com\/us\/wp-json\/wp\/v2\/categories?post=6436"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.acobloom.com\/us\/wp-json\/wp\/v2\/tags?post=6436"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}