1031 exchange - What is it?

[Dave T]

Section 121 is best for you if you meet the two year ownership and occupancy requirements to take all your sale profit tax free.  If you fail to meet the two year requirements a tax free "reduced maximum exclusion" is also available if you meet certain hardship requirements.   The Section 121 capital gains exclusion is available to you but you are not required to use it if you don't want to.

Only if you fail to satisfy any of the requirements you need to meet to take your sale profit tax free, do you want to consider converting your primary residence to an investment rental.  Using the property as an investment rental for a period of time (I suggest one year), will make the property eligible to participate in a 1031 exchange.

The QI won't care that the property was your former primary residence, only that the property is currently qualified exchange property and that your replacement property is "like-kind" property.

[Faraglioni]

Dave T,
thanks a lot for taking time to answer my questions!
How do I convert the my primary property into a rental property? Do I just start renting it out? Any paperwork that need to filled out?
Thanks again.

[Dave T]

Just move out and start advertising for renters.

[Faraglioni]

Dave T,
sorry for such an overwhelming amount of questions
What about the liability protection then? I can't put a primary residence into an LLC w/o triggering the DOS clause. What type of insurance should I get? For how much?
Thanks again!

[Dave T]

I am not sure you would want to put your primary residence into an LLC.  

I believe the $250K/$500K capital gains exclusion is only available to individuals.  It is not clear to me that you would still retain the exclusion if your LLC owns your primary residence.  Not sure on this point, but it is something to check.

You conduct all your business activity from within your LLC to shield your personal assets from exposure to a lawsuit arising out of your business activities.  The LLC "limits" your liability to only the assets owned by the LLC -- hence the name, Limited Liability Company.  Putting your personal residence into your LLC removes your home from the liability shield provided by your LLC.

If you are sued personally over something that happens in your home, your homeowner's insurance carrier will defend you in the lawsuit and pay any judgement award up to your limit of coverage, provided they were not able to reach an out of court settlement.
 
These are all legal questions to address with your attorney.  I am not an attorney, nor a CPA.  My responses are provided for educational purposes only and are not to be construed as either legal or tax advice.

[ericgleason]

While many of the responses are excellent, I believe that your question is related to why you are seeing 1031 exchange in the MLS listings.  
Typically when a real estate agent indicates 1031 exchange in the listing it means that the seller is on the front end of a 1031 exchange.  Whereby the seller needs the buyer to 'cooperate' in the exchange.  There are no fees, expenses, or inherent risks for the buyer to cooperate in the exchange process.  It does require the buyer(s) to sign some additional paperwork indicating that the seller is participating in a 1031 exchange and the property is actually being sold by the Qualified Intermediary (through assignment of the contract).  Again there is no impact to the buyer in the terms and conditions of the real estate contract other than assignment by the seller to the Qualified Intermediary.

[William L. Exeter]

Faraglioni,

I saw your post above regarding the IRS Code not requiring a Qualified Intermediary (QI).  Section 1031 of the Internal Revenue Code is fairly brief and dates back to 1921 and does not mention anything about a QI.  It is Section 1.1031 of the the Treasury Regulations that were proposed in 1991 that spell out the requirements for a delayed 1031 exchange in much more detail that actually discussed the requirement for a QI.

[strted@22]

hi guys and gals

I heard you have to own the property for a year and then I heard you only have to own it for the time you are going to 1031 it. what is the time frame for it?

thanks