1031 exchanges in La Jolla: how they work for investment property

What a 1031 exchange means

A 1031 exchange is named for Section 1031 of the tax code. It is a trade of real estate held for business or investment for other “like-kind” real estate, meaning real estate of the same general type. No one can promise a given La Jolla sale will qualify. This page does not tell you to do or skip an exchange.

In this guide:

• The property you sell and the property you buy
• The Qualified Intermediary: the middleman who holds the money
• The IRS deadlines
• Reporting, and what happens if you get cash back
• Where to read more: cost to sell, guides and buying & selling

Our sources are the IRS tax tips on like-kind exchanges and the instructions for IRS Form 8824. They do not replace advice on your tax return or exchange contract.

The property you sell and the property you buy

In a delayed exchange, the property you give up is called the relinquished property. The property you get is the replacement property.

What the IRS says (your tax adviser decides if you qualify):

• Business or investment use: both properties must be held for business or for investment.
• Like-kind: the same general type, even if quality differs. U.S. real estate is usually like-kind to other U.S. real estate. It is not like-kind to real estate outside the U.S.
• Real estate only: since the federal tax law called the Tax Cuts and Jobs Act, Section 1031 covers only real estate, not other things like equipment.
• Not for resale: property held mainly to sell, like a flip, does not qualify.

Your own home is not covered here. The IRS treats a home you live in under separate rules. Ask your tax adviser.

The Qualified Intermediary (QI)

A Qualified Intermediary (QI) is the middleman in many delayed exchanges. The Form 8824 instructions say that when the rules are met, using a QI lets the sale and the purchase count as one exchange. Relatives, related businesses and your own agents cannot be your QI.

In plain words (check current rules with your tax adviser and QI):

• The QI holds the sale money so you do not take control of it too early. Touching the cash too early can break the exchange.
• You cannot be your own QI.
• Someone who has recently acted for you as your real estate agent, accountant or lawyer cannot be your QI. The IRS sets how far back that rule looks.
• Weston Clark, the Dickinson-Clark Team and Compass are not a QI.
• Ask your tax adviser or lawyer to help you pick a QI.

Weston handles the real estate contracts. That work sits beside the exchange. It does not replace your tax adviser or your QI contract.

The IRS deadlines

The Form 8824 instructions set two deadlines for a delayed exchange:

• 45 days to name: you must name the replacement property within 45 days after you transfer the property you sold.
• 180 days to close: you must get the replacement property within 180 days, or by your tax return due date (with extensions) for that year, whichever comes first.

How to name it: in writing, with a clear description (for real estate, a legal description, street address or clear name). It must be delivered within the 45 days to someone in the exchange who is allowed to receive it, as the instructions say.

These 45- and 180-day limits come from the IRS. They are not a date plan for your own sale. Check every date with your tax adviser and QI.

Reporting, cash back, and putting off tax

The IRS says you report an exchange on Form 8824, Like-Kind Exchanges. If you also get cash or other property that is not like-kind, you owe tax on gain up to that amount. You cannot claim a loss.

Keep in mind (this is not advice for your return):

• Put off is not wiped out: the IRS calls this tax-deferred, which means delayed, not tax-free. We do not claim any dollar amount.
• Cash or other property you get (often called “boot”) can be taxed. Ask your tax adviser to do the math.
• Tax basis (the cost figure used to work out gain) usually carries over from the old property to the new one, with changes. Your tax preparer handles this.

Where this fits with other guides

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