1031 Exchanges allow real estate investors to defer taxes on certain property types by exchanging them for similar assets and reallocating that capital to more valuable properties. While this unique tax advantage can be applied to any property used for business purposes, 1031 exchanges in Florida are especially popular among commercial property and vacation rental owners.

A 1031 Exchange involves the sale of one investment property, followed by the acquisition of another, and it is essentially utilized with investment or business properties. Reinvestment of the proceeds from the property sale enables you to defer paying capital gains taxes on those funds. 

What types of property qualify for a 1031 Exchange?

Any property used exclusively for business purposes is eligible for a 1031 exchange. The IRS does not permit exchanges on primary residences and implements specific rules to exclude ineligible properties. Types of properties that may be eligible:

• Multi-family buildings
• Agricultural properties (ranches, farms)
• Commercial properties (shopping malls, industrial areas, recreational land)
• Conservation properties
• Vacation rental properties (as long as the exchanger has not used it as a primary residence. According to the IRS, this means not spending more than 14 nights or 10% of the days rented annually).

Points to Consider…

1. All types of 1031 exchanges must be “like-kind.” According to the IRS, “properties are of like-kind if they’re of the same nature or character, even if they differ in grade or quality […] regardless of whether they are improved or unimproved.”
2. All properties must be located in the United States, including the relinquished property – the property being sold –  and the replacement property – the new property being purchased.
3. Personal properties or primary residences are not eligible for a 1031 exchange.
4. Under the 1031 exchange, the new or replacement property must be equal to or higher in value than the relinquished property to defer the entire capital gains taxes. If the value of the replacement property is lower, an investor can settle the 1031 exchange by paying the difference between the properties’ prices.

Time Requirements for 1031 Exchanges in Florida

To ensure a successful 1031 transaction, the process must be completed within the IRS’ timeframes. 

There are critical date to identify replacement property and to close on the sale.

Forty-five calendar days from the date of the sale of the relinquished property are available for investors to find potential replacement properties they wish to acquire. A list of no more than three properties must be submitted to the qualified intermediary within this 45 day window. 

An investor has 180 calendar days from the date of sale of the relinquished property to complete the acquisition process for the replacement property. 

If the investor fails to meet the 45-day identification period or the 180-day closing period deadline, their 1031 exchange will be disallowed. Both deadlines start counting from when the relinquished property closes, with time for identifying potential replacement properties and closing one within the 180 days. What this means is that if it takes 45 days to identify a property, there are only 135 days left to perform all required due diligence and close on the property.

Types of 1031 Exchanges

Delayed – This is the most common type of 1031 exchange, where a third-party intermediary, known as the Exchange Accommodation Titleholder (EAT),  typically holds the funds for up to six months (180 days). Here the exchange happens in two phases: the relinquishment (sale) and the acquisition (new purchase(s)). In the relinquishment, the property is sold to a third-party and the EAT holds the funds in escrow. Then the acquisition phase begins where the exchanger has 45 days to identify a like-kind replacement property. Next, the buyer must purchase the new property within the 180 days to defer capital gains on the purchase.

Reverse – It is the same as Delayed but in reverse. The buyer purchases a new property, and then they have 180 days to sell their existing property. Reverse exchanges can be helpful if the buyer owns multiple investment properties and wants to exchange one of them. The EAT agrees to hold the title of the newly purchased property for the duration of the sale process.

Simultaneous – Simultaneous swap of one property for another; at the closing of the relinquished property the client would have to know somebody who owns another piece of property that they are willing to exchange.

Improvement – involves improving the property to be exchanged. Once the closing occurs in an improvement exchange, an EAT becomes the property owner until the promised improvements are made within the 180-day time limit.

It is important to understand the implications and the mechanics of acquiring new property through the 1031 Exchange, that is why consulting with a seasoned, experienced Real Estate Attorney is essential to enjoy the advantages associated with this tax planning strategy. A knowledgeable professional can assist you in satisfying the regulatory requirements and legal procedures to defer payment of capital gains taxes, which are otherwise payable to the IRS without exception.