1031 like kind exchange rules and core real estate investment analysis concepts for investors and agents.
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- What is a 1031 exchange?
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A transaction where a property owner trades real property for other like-kind real property while deferring capital gains tax.- What qualifies as like-kind property in a 1031 exchange?
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Property of similar nature or character. Under current law, only real property qualifies; property types (residential, commercial, land) can be mixed.- What is the 45-day rule in a 1031 exchange?
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The deadline to identify potential replacement properties, counted from the date the original property is sold.- What is the 180-day rule in a 1031 exchange?
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The deadline to close on the replacement property, counted from the date the original property is sold.- What is boot in a 1031 exchange?
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Cash or other unlike-kind property received in the exchange; any boot triggers capital gains tax on the amount received.- Why is a qualified intermediary required in a 1031 exchange?
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The seller cannot directly touch the sale proceeds; a third party must hold the funds to preserve the tax-deferred status.- What is a delayed 1031 exchange?
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The most common type, where the replacement property is identified and purchased after the sale closes.- What is a simultaneous 1031 exchange?
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An exchange where the sale and purchase close at the same time, also called a direct exchange.- What is the 3-property identification rule?
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A taxpayer can identify up to 3 replacement properties without additional restrictions under a 1031 exchange.- What is the 200% rule in 1031 exchange identification?
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If more than 3 properties are identified, the aggregate fair market value of all identified properties cannot exceed 200% of the relinquished property's value.- How is capitalization rate (cap rate) calculated?
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Net operating income divided by property value or purchase price, expressed as a percentage.- What does a higher cap rate suggest about a property?
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Greater potential return on investment, but often indicates higher risk or a less desirable location.- How is cash-on-cash return calculated?
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Annual cash flow (after all expenses and debt service) divided by the initial cash invested, expressed as a percentage.- What is the debt service coverage ratio (DSCR)?
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Net operating income divided by total annual debt service (principal and interest payments).- What DSCR do most lenders require?
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Typically 1.2 to 1.25 or higher, meaning the property must generate enough NOI to cover debt service by that multiple.
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