How Does a 1031 Exchange Closing Work in Florida?

It is a federal tax rule, not a Florida one. Under 26 U.S.C. 1031, no gain or loss is recognized when real property held for productive use in a business or for investment is exchanged solely for like-kind real property held the same way. The investor defers the gain. The tax is not forgiven.

Since January 1, 2018, the rule generally covers only real property, not equipment, vehicles, or other personal property, according to the IRS. The IRS says improved real property is generally like-kind to unimproved real property, so a duplex held as a rental is generally like-kind to vacant land held for investment. Real property in the United States is not like-kind to real property outside it.

Most exchanges are deferred: one property is given up and the replacement is received later under an agreement. The Form 8824 instructions call a qualified intermediary exchange one safe harbor. The closing side then has two files, the sale and the later purchase.

Two things change: the paperwork and the money. Before the sale closes, the investor signs an exchange agreement with a qualified intermediary and assigns the sale contract to it. Under Treas. Reg. 1.1031(k)-1, that assignment works when all parties to the contract are notified in writing on or before the date the property is transferred.

The intermediary is then treated as acquiring and transferring the property, so the deed can run from the investor straight to the buyer. The intermediary cannot be a disqualified person, such as a relative or anyone who acted as the investor's attorney, accountant, broker, or real estate agent within the two years before the sale, with narrow exceptions.

The money is the bigger change. The exchange agreement must limit the investor's right to receive, pledge, borrow, or otherwise benefit from the money before the exchange period ends. IRS Publication 544 says money is constructively received when it is credited to your account or set apart for you, so the net proceeds on the Florida settlement statement are paid to the intermediary, not the seller.

On a Time to Close Title file, as our investment property closing guide explains, when a qualified intermediary is named in the contract for an exchange, the closing follows that written instruction. The title company does not decide whether the sale qualifies or calculate the tax. See closing services.

Both clocks start the day the relinquished property is transferred. Section 1031(a)(3) requires the replacement to be identified within 45 days and received by the earlier of 180 days or the due date, with extensions, of the tax return for the year of the sale. The regulation says each period ends at midnight on its last day.

Identification is a signed writing delivered in time to the person transferring the replacement, or to another person in the exchange who is not disqualified, such as the intermediary or a title company. The Form 8824 instructions say to describe the property by legal description, street address, or distinguishable name.

An investor may identify up to three properties regardless of value, or any number whose total fair market value does not exceed 200 percent of the value of the property given up. Identifying too many is treated as identifying none, with limited exceptions. A replacement actually received within the 45 days counts as identified.

For a sale late in the year, the return due date can come before the 180th day unless the return is extended. The table leaves that date blank because it depends on the taxpayer's own return.

The same taxpayer who sold should receive the replacement. The regulation has the intermediary acquiring the relinquished property from the taxpayer and transferring the replacement to the taxpayer, and Publication 544 says the deed can come from a third party. The buyer on the new deed should match the seller on the old one.

The purchase contract is assigned to the intermediary the same way, with written notice to all parties on or before that closing, and the seller deeds the property to the investor. Buying in a new LLC or adding a spouse or child can change whether the exchange works, so settle it with a tax adviser before signing. Our guide on how Florida buyers take title covers the vesting choices.

When the replacement has to be bought before the old property sells, the Form 8824 instructions describe a qualified exchange accommodation arrangement under Revenue Procedure 2000-37. An exchange accommodation titleholder holds the property for a time, so someone other than the investor can be in the chain of title, and the title work has to follow it.

Cash or other property that is not like-kind, often called boot, can be taxed even when the rest of the gain is deferred. Under section 1031(b), the gain is recognized up to the money received plus the fair market value of the other property. Under section 1031(c), a loss in that situation is not recognized.

Debt counts too. Section 1031(d) treats a liability the other party assumes as money received, and the Form 8824 instructions net the liabilities on each side. How a payoff at the sale and a new loan at the purchase are treated is a question for the tax adviser.

Not every closing statement line is an exchange expense. Publication 544 lists brokerage commissions, attorney fees, and deed preparation fees as typical exchange expenses, and says property taxes, rent prorations, security deposits, and repairs on the closing statement are not. Raise any planned cash out, or a personal bill paid from the proceeds, before closing.

Yes. Section 201.02, Florida Statutes, sets the tax on deeds that convey Florida real property at 70 cents per $100 of consideration, counting any mortgage whether or not it is assumed. The section does not mention section 1031 or like-kind exchanges, so the sale deed and the purchase deed are each taxed on their own consideration.

Our explainer on documentary stamp tax on a Florida deed covers the Miami-Dade rates, the exemptions, and who is liable.

Form 1099-S is generally still filed on the sale. The Form 1099-S instructions say a reportable sale or exchange includes any transaction treated as a sale or exchange for federal income tax purposes, even if it is not currently taxable. See who files Form 1099-S on a Florida sale.

The investor reports the exchange on Form 8824 with the return for the year the relinquished property was transferred, even when no gain is recognized, according to Publication 544. Keep the identification and both closing statements for it.

A home used only as a personal residence does not qualify. The Form 8824 instructions say section 1031 does not apply when the property given up was used solely as a personal residence at the time of the exchange. A Florida homestead that is the owner's permanent residence is usually that kind of home.

A former main home or a property used partly as a home has separate section 121 rules in the same instructions. Property held primarily for sale is excluded by section 1031(a)(2), so a house bought to fix and resell quickly may not qualify. Investors in Hernando County face the same federal test.

Related people get a second look. Under section 1031(f), if the investor exchanges with a related person, such as a spouse, child, parent, or sibling, and either one disposes of the property within 2 years, the deferral is generally lost. An exchange structured to avoid that rule is not a like-kind exchange.