1031 Exchanges

A 1031 exchange, named for Section 1031 of the Internal Revenue Code, can let you sell an investment property and buy another without paying capital gains tax right away. The tax is deferred, not forgiven. Many Emerald Coast investors use exchanges to trade up, move into a different market, or swap a long-term rental for a vacation rental.

What qualifies

Both the property you sell and the property you buy must be real property held for investment or for use in a business. Your primary residence does not qualify. Since 2018, only real estate qualifies — not furniture or other personal property, which matters for furnished vacation rentals.

The two deadlines

• 45 days: After you close on the sale, you have 45 days to identify possible replacement properties in writing.
• 180 days: You must close on the replacement property within 180 days of the sale, or by your tax return due date if that comes first.

These deadlines generally cannot be extended, so it helps to start looking before you sell.

Use a qualified intermediary

You cannot touch the sale proceeds. A qualified intermediary holds the money and handles the exchange paperwork. It must be set up before your sale closes. Your real estate agent, attorney, or accountant generally cannot serve as your intermediary.

Cash and debt (“boot”)

If you take cash out or buy a less expensive property, part of the gain may be taxable. To defer all of the tax, investors generally buy a property of equal or greater value and reinvest all the proceeds.

Vacation homes and second homes

An IRS safe harbor (Revenue Procedure 2008-16) explains when a vacation home can qualify. In general, the property is held for at least 24 months, rented at fair market rent for at least 14 days in each of those years, and your personal use stays within the greater of 14 days or 10% of the days it is rented. Exchanges are reported to the IRS on Form 8824.

We can help you find replacement properties that fit your timeline and connect you with qualified intermediaries. Call 850.225.9785 or email christine@docksiderealtyinc.com.

This page is general information to help you plan. It is not legal, tax, insurance, or lending advice, and rules can change. Please confirm details with the appropriate professional before you make decisions.