FAQ's​

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Below are some of the most common questions real estate investors have about 1031 exchanges. If you don’t find what you’re looking for, feel free to reach out to us directly for more personalized guidance.

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1. What is a 1031 Exchange?

A 1031 exchange allows real estate investors to defer paying capital gains taxes on the sale of an investment property by reinvesting the proceeds into a "like-kind" property. Essentially, it’s a strategy that enables you to exchange one property for another without immediately incurring tax liabilities.

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2. What is "Like-Kind" Property?

"Like-kind" property refers to real estate that is of the same nature or character, but it doesn’t need to be identical. For example, you can exchange a commercial property for a residential rental property, as long as both properties are held for investment or business purposes.

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3. What are the Benefits of a 1031 Exchange?

• Tax Deferral: The primary benefit is the deferral of capital gains taxes. This allows you to reinvest more money into a new property.

• Wealth Building: By deferring taxes, you can leverage your investment to acquire more valuable properties over time.

• Portfolio Diversification: A 1031 exchange allows you to diversify your real estate holdings (e.g., exchanging a single-family rental for a multifamily property).

 

4. What Properties Qualify for a 1031 Exchange?

Properties that are used for business or investment purposes qualify for a 1031 exchange. These include:

• Residential rental properties

• Commercial properties

• Industrial properties

• Raw land (held for investment)

 

Note: Properties used for personal purposes (e.g., primary residences) are not eligible for a 1031 exchange.

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5. How Long Do I Have to Complete a 1031 Exchange?

 

You must complete your 1031 exchange within strict timelines:

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• 45-Day Identification Period: From the sale of your property, you have 45 days to identify potential replacement properties.

• 180-Day Exchange Period: You must close on the replacement property within 180 days from the sale of the original property.

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6. What is a Qualified Intermediary (QI)?

 

Commonwealth1031.com LLC is a Qualified Intermediary (QI) and will serve as your independent third party who facilitates the 1031 exchange. As your QI, we will hold the sale proceeds from your property and transfer them to the seller of your replacement property. Using a QI ensures compliance with IRS rules and safeguards the funds, as the investor cannot take possession of the proceeds during the exchange process.

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7. Can I Use a 1031 Exchange for My Primary Residence?

 

No, you cannot use a 1031 exchange for your primary residence. The property must be used for investment or business purposes. However, if you convert your primary residence into a rental property, you may qualify for a 1031 exchange when selling the property as part of the exchange.

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8. What Happens If I Don’t Complete the Exchange on Time?

 

If you fail to meet the 45-day identification or 180-day closing deadlines, the exchange will not be considered valid, and you will be required to pay capital gains taxes on the sale of your property.

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9. What is Boot in a 1031 Exchange?

 

"Boot" refers to any form of compensation or property received in the exchange that is not like-kind, such as cash or personal property. Receiving boot can trigger a taxable event, meaning you may be liable for taxes on that portion of the transaction.

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10. Can I Do a 1031 Exchange More Than Once?

 

Yes, you can do multiple 1031 exchanges throughout your investment career. In fact, many investors use the 1031 exchange as a long-term strategy to defer taxes and continually grow their portfolios.

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11. What Types of 1031 Exchanges Are There?

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• Simultaneous Exchange: Both the sale and purchase of properties occur on the same day.

• Delayed Exchange: The most common type of exchange, where the sale and purchase happen on different dates (within the 45-day and 180-day windows).

• Reverse Exchange: You acquire the replacement property before selling your original property.​

 

12. Do I Have to Reinvest the Entire Proceeds?

 

To fully defer capital gains taxes, you must reinvest the entire amount from the sale of your property into the replacement property. If you take any cash or receive any non-like-kind property (boot), that portion will be subject to taxation.

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13. How Can I Get Started with a 1031 Exchange?

 

To get started, contact us for a consultation. Our team will guide you through every step of the process, help you identify suitable replacement properties, and ensure that your exchange complies with all IRS requirements.

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14. Do You Provide Legal or Tax Advice?

 

While we provide guidance on the 1031 exchange process, we do not offer legal or tax advice. We recommend consulting with your attorney or tax advisor to ensure that the exchange is in line with your broader financial and investment strategy.

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If you have more questions or are ready to start your 1031 exchange, contact us today! Our team is here to help you navigate the process and make the most of your investment opportunities.