1031 Exchange on Sanibel & Captiva
Many of our clients see their Sanibel and Captiva real estate purchase as an investment. We have “second home” customers who rent out their island home when not in use. We have “future retirement” customers who buy now and rent their island home until they reach retirement. And we even have customers who purchase their island home solely as an investment for rental income.
Investors big and small, are attracted to our islands – and for good reason! It’s always interesting to hear the stories of customers who wish to use a 1031 Exchange on Sanibel. While it’s not the most common transaction type we handle in our office, we do have a good amount of experience in handling the “Starker Exchange” or “Like-Kind Exchange” as they are also referred to.
We’ve boiled down some of our 1031 Exchange knowledge into a few key factors we thought you should know…
There Are Four Types of 1031 Exchange
1.) Simultaneous Exchange – This exchange occurs when two “like-kind” properties are swapped for each other. As you might guess, it’s not very common, since it’s unlikely that two property owners will want exactly what the other has, and that both properties will meet 1031 Exchange compliance.
2.) Delayed Exchange – This exchange is the most common type that we handle, and provides an investor 180 days after the sale of their relinquished property [the current investment they wish to sell] to identify a replacement property(s) [the new property(s) they wish to buy.]
3.) Reverse Exchange – This exchange allows an investor to buy first and sell after. There are a number of rules around this type of exchange, especially in regards to the titling process.
4.) Construction/Improvement Exchange – This exchange is useful for circumstances where the replacement property costs less than the relinquished property, and allows you to count the cost of improvements towards your replacement property value.
Seven Rules Regarding 1031 Exchange
#1 – Business or Investment Only – A 1031 Exchange can not be used for personal property, such as your primary residence, or even a family member’s primary residence. The exchange only applies to an investment or business property.
#2 – Like-Kind Property – Both the relinquished and replacement properties must be “like-kind” in that both are real property. For example, you can not exchange work machinery for a condo on Sanibel, but you can exchange different types of real estate property such as a condo for a home, or a commercial property for vacant land, as long as it’s within the Unites States.
#3 – Equal or Greater Value – The exchange does not always have to be one-for-one, but the value of the replacement property does have to be equal or greater than the relinquished property in order to defer 100% of the tax. There is such thing as a partial 1031 Exchange deferment, where the replacement property is of lesser value than the relinquished property. In this case, you will need to pay the difference in capital gain taxes (often called the boot).
#4 – Identification Window – There is a 45 day identification window that begins after the sale of your relinquished property where you must identify three like-kind properties as potential replacement properties for the exchange. An exception is the 200% rule, where an investor can identify four or more properties as long as the value of the potential replacement properties combined does not exceed 200% of the relinquished property value.
It’s also important to note that the replacement home purchased must be one of the properties identified within the initial 45-day period. No new properties can enter the equation after the identification window has passed.
#5 – Purchase Window – There is an 180-day purchase window for the entire transaction, which runs concurrent with the 45-day identification window. Actually, the purchase window is 180 days OR the due date of the income tax return for the tax year in which the relinquished property was sold – whichever is sooner. However, you can file for an extension so that you may use the entire 180 days if this happens.
#6 – Qualified Intermediary – A Qualified Intermediary (QI) must administer the 1031 Exchange. This person handles the documentation process and all of the funding for the exchange. Oddly enough, there are no federal or state regulations for QI’s.
In fact, the majority of companies providing QI services are not bonded to the exchange, since no licensing requirements exist within the state. In the state of Florida, however, the Florida BAR client relief fund states that an attorney acting as a QI for a 1031 Exchange is bonded up to $1M per transaction. Therefore, most of our clients use accountants or attorneys specializing in the 1031 Exchange process.
#7 – Title/Tax Payer Name – The name of the tax payer and title owner must be the same on both the relinquished and replacement properties. There are processes involved in adding or removing a spouse or partnership, and a few different workarounds to get in compliance with the code. It is important that you follow proper protocol for all of the rules and regulations, or your exchange can be disallowed by the IRS.
We hope this information has shed some light on what is often an unfamiliar topic for new investors. Know that the information contained in this blog is not intended to be, and should not be considered or relied upon as, legal, tax or accounting advice.
We want to thank Dave Owens and Mike Rhinehart of Midland IRA for their help in reviewing the information in this blog post. We always suggest speaking directly with a Qualified Intermediary before starting the 1031 Exchange process.
As always, don’t hesitate to reach out for more information! We have a list of great resources that we are happy to share. Simply email team@McCallionRealty.com or call 239-472-1950.