What is a 1031 in Real Estate?
On a recent episode of The Fine Print in Real Estate podcast, David Frank and Amber Kardosh sat down with Anna Barsky to educate our listeners on 1031s. You may have heard that you can avoid capital gains tax on the sale of your property when you purchase a new one. That’s called a 1031.
Anna Barsky from IPX1031 is an expert on the subject and generously offered her time and expertise on 1031s. Listen, watch, or read below to learn from Anna. What is a 1031? How do you qualify for one? What are the rules and potential pitfalls? We cover it all in this 30 minute episode.
Transcript:
All right. Welcome back. We are here for our next episode of The Fine Print in Real Estate. I'm Amber Kardosh with @ Properties Christie's International. And I'm David Frank, managing member of the David Frank Law Group. And we're excited today because we have a special guest.
Many of our listeners know or think they know about 1031 exchanges, and we thought it was finally probably helpful if everyone actually got to hear exactly what a 1031 exchange is. So we have Anna Barsky from IPX 1031. Happy to be here. Thank you for having me. Thanks for coming. Why don't you give our listeners a little bit more about what the heck is a 1031 exchange?
Of course. So a 1031, it's often seen as the last kind of tax strategy out there for real estate investors. And essentially what our government says is that if you're selling investment or business use real estate, you can defer paying the taxes on the profits from that sale by buying another piece of investment or business use real estate. So really all that it is, is a sale plus a purchase equals a tax deferral.
Got it. And you've been with IPX 1031 for how long? I just had my 18th year anniversary. Oh my God. And prior to that, I did 1031s for another exchange company. So I've been in the business for over 20 years. Yeah. I started out in commercial and have moved more towards residential. And I met Anna during the commercial days. And we've been running our 1031s through Anna since then. Yeah.
How many 1031s have you done over the course of your career? Is it hard to say? It's hard to say. You know, it depends on the year. You know, with real estate, of course, so cyclical. But usually I do about 2,000 transactions a year. And as a company, we're a national 1031 qualified intermediary. We do over 40,000 exchanges every year.
Holy cow. Yeah. So who owns IPX 1031? We are a wholly owned subsidiary of Fidelity National Financial, which is a Fortune 300 company and the company that owns some of the title companies that you may have heard of, Chicago Title, Fidelity National Title. There's a whole list. They're essentially the largest title insurance company in the world, and they own us as well. Got it. So...
In that list, I heard Fidelity. I heard Chicago Title. Yeah. Obviously, you can work with those title companies, but I'm guessing you can work with any title company. Is that accurate? Absolutely. So those are the companies we happen to be affiliated with. But no matter where your closing is taking place, we can handle the 1031 exchange. Got it. Cool.
So with the 1031 exchange, at what point should an investor reach out to you to get it started? Should it be like once they put their current property under contract before and kind of explain the 45 day identification of the like kind? What is a like kind property and kind of 180 closing thing kind of explain the process a little bit on a high level? Of course.
So it's best to get us involved in the process as soon as possible, just in case there's a complex issue that we need to work through. But generally speaking, we get involved in between the time a contract is signed and a closing takes place. Because our role as the 1031 company is that we hold your clients' funds in between the time they sell the old property and buy the new property.
That's because the IRS says if you want to do an exchange, you can't touch your funds. We also draft all the 1031 documents that the IRS requires. So you absolutely must get the exchange set up prior to the closing of the sale. We typically need about two to three business days notice to turn that around. But usually once a contract is signed and there's a deal in place, that's a good time to reach out to me. Once the sale does close, the clock starts ticking on the 1031 time period.
So that's one of the 1031 rules is you have to identify replacement property within 45 days of the sale closing. And you have to buy one or more of those identified properties within 180 days of the sale closing. And what happens if for some reason that second, like you don't get it done, maybe it blows up, maybe something happens where you miss that 180 day, what happens?
Yeah, unfortunately, the time periods are black and white, so there's not much flexibility. If you don't identify anything in the 45-day period, then you have to pay up. Yep, it's a failed exchange. Or if you can't buy what you've identified in the 45-day period, unfortunately, a failed exchange. Or if you can't close on those properties in that 180-day period, unfortunately, you do have to pay your taxes. Oh, that's unfortunate.
So the 45-day period, I mean, that scares people because that's quick. Yes. You know, we're talking six weeks. Explain to me what identifying a property actually means per the IRS. Yeah, of course. So you're 100% right. That is scary for most of our clients.
I would say the number one reason why 1031 exchanges fail is the 45-day identification period and the identification rules because you are limited to the amount of properties you can identify. So the biggest piece of advice I can give is plan ahead as much as possible. So if you're an investor and you're thinking about selling your property, talk to your attorney, talk to your broker about the fact that you want to do an exchange and
And they could start looking for the new property right away. You don't have to wait until the sale closes and the clock starts ticking.
One of the common questions we get is, hey, we have this property listed. We have a lot of interested buyers. I've started looking for my new property. Can I sign a contract on my replacement property before I've closed on my sale or before I got my exchange set up? Absolutely. Obviously, that's contingent on the sale closing, but it's a little bit of a balancing act as far as those conversations and those negotiations are concerned.
And to answer your other question, identification itself is easy. All you do is just fill out a form that we provide, put the address of the property, sign it, date it, send it to us. Got it. Is there ever a question, like if you connect with an investor to do a 1031,
Are there questions that that the investor could ask, you know, an agent, an attorney or something proactively before they come to you that would be helpful? Like, do you ever see they come to you and they're like, well, you should have talked that to your attorney or you should have mentioned that. Is there anything like that or is it just kind of like, hey, I'm selling an investment property. I want to defer my capital gains. What do I do?
Sure. No, good question. I would say one of the common issues that comes up is you're selling property in a partnership or a corporation. There's other sellers that are involved. Some want to do an exchange and some don't. So if you and your partners have different investment goals, that is something that we want to deal with sooner rather than later. Got it.
If you're providing seller financing to the buyer, that has to be structured in a very specific way in order for the financing to qualify for 1031. So those are some of the kind of tricky things that come into play. Do you see that a lot, seller financing? Yeah, depending on where the interest rates are at.
And some folks, that's just to get that buyer in the door, they're like, "We'll do seller financing or we'll do an installment contract," which is really a different way of doing seller financing. Other than that, I think it's just important that the investor knows some of the basic rules, like you have to buy property of equal or greater value. That value is based on the contract sales price. One of the misconceptions is that you just have to reinvest your profit to get the full benefit of the exchange.
So bringing it up to your attorney or to your realtor ahead of time, you can kind of discuss some of those basic rules so you know what you're getting into as far as the replacement property is concerned. Got it. And so the like kind that they identify from the IRS rules, that doesn't mean the exact same property, right? Can you explain what that actually means? Yes. This is an area of the tax code that you actually have some flexibility, believe it or not. Yeah.
All investment in business use real estate is like-kind and can be exchanged for any other type of investment or business use real estate. So you could sell a single family rental, buy a piece of vacant land. You could sell a three flat, buy a retail center. You could sell an industrial property, buy a piece of farmland. So really the like-kind requirements are very broad. So in this market, it's a seller-driven market.
market values are way up. And there are some married couples, single couples who are, or single individuals who are over that 250 capital gains threshold, or for a married couple over the 500,000 capital gains threshold. If you're over one of those thresholds, can you 1031 that capital gain on a residential property? And,
Unfortunately, no, because 1031s are only for investment or business use real estate. So any type of personal use property, like a primary residence, wouldn't qualify for 1031. That's unfortunate. I mean, we are seeing a lot of that now with the prices have gone up. We get those questions as well. Or, you know, I've been living in the property for a year and a half, so I can't use the exclusion because it hasn't been two years and we have to suddenly move. You know, can we use an exchange? Unfortunately, that's not a 1031. Oh, that's interesting, too. So if you're under the two-year period,
and you're going to get hit with short-term capital gains, even though you've lived there, you can't use a 1031. Because you've lived there. Got it. Yep. Got it. That is interesting. Okay. So is there, so like I have clients who are flippers and I think, you know, David and I have come across that where they, they tend to think that they can flip, sell it and then use the proceeds into another one. Can they do that?
Another kind of asset class that doesn't qualify for 1031 are flippers. So a buy-build or buy-rehab-sell scenario unfortunately isn't like-kind property because there's a specific rule that says property held primarily for resale is not exchangeable. And that rule does speak specifically to flippers or developers. Those types of assets are considered inventory, not investment. So if the client's intent was not to
hold the property long-term. Generally, with residential, we're talking about rental, right? Right. So if their intent was not to hold on to it for a long-term rental and get cash flow from the property, it usually doesn't fall under Section 131. Okay. Even if, say, their intent was to flip it, but then they're like, okay, maybe I'll rent it. Is there a certain period of time they can rent it to then...
go back to the 1031 and qualify? Good question. There are no specific holding period requirements, which is kind of like the tricky part. It might be easier if the IRS is like, you have to hold on to it for this long. Otherwise, you know, you don't qualify. So it is all about your intent, which is difficult to measure sometimes.
I don't like to throw out any time periods because it is very circumstantial, but the more conservative CPAs will say, hey, you've held it for two years. If you've reported rental income for two years, there is no way that the IRS can argue that it's not investment property. Got it. But we've certainly seen folks rent the property for a year and a half, and then they got a great offer that they couldn't refuse, and they sell the property and do an exchange and buy another investment property. Interesting.
So we're only five or 10 minutes in and you can see how complicated this can get. In my experience in working with IPX 1031, you can literally, I've seen you jump in on the day of a closing.
They're not aware. We don't want to recommend that. We don't want to recommend that, but I've seen you do it. Yes, yes. And you can actually change an entire closing from a non-1031 to a 1031. Right. And then most of it's done electronically with electronic signatures from what I can recall. Maybe there's a couple originals that you need. Right. And then you guys actually provide a great calendar for...
you know, when do you have to identify? When do you have to close? Right. And it really becomes this very convoluted, complicated thing, very simplistically done. Am I overstating that? No, and I appreciate that. I take that as a compliment. We try to take this like,
tax code that has lots of intricacies and make it as user friendly as possible. Because at the end of the day, like I said, it is really a sale plus a purchase equals a tax deferral. And there are some rules that you have to kind of follow in between.
We are used to the fire drill in our office. A lot of times it is day of closing or day before closing and the client's like, oh, I forgot to tell you, I need to do a 1031 exchange. And up until the check is cut to the seller, we could still get the exchange set up. So once the seller has had constructive receipt of the funds, unfortunately, the funds are taxable.
But if it is day of closing, that seller has not touched the money, we could step in, get the exchange set up, coordinate with the title company to have the funds then sent to the 1031 account. We get all of our docs in place. And then the other part of our role is to advise you and the client and make sure you're following all the guidelines and getting the successful tax deferral. So we do help keep track of the time periods and send reminders and things like that.
I'll tell you an interesting story. Right when I started my firm, I had a realtor and he specialized in a lot of Gold Coast real estate. And a lot of it was investor stuff. And one of his clients came to me and sold the property and we sold it and it wasn't a 1031. We closed. And like a month later, he called me back and he was like, why didn't you tell me about a 1031? I could have had a capital gains deferral on this. And-
I was like, you know, that's your decision whether to do a 1031 or not. And it really changed my whole perspective on it. His, he was coming to us, you know, this is for all the realtors and the attorneys and the CPAs who are listening to our podcast. And he was expecting that.
to be told that this was an option. And so we've since added it to the checklist. We make sure any investor property, they're at least told, and then they can decide what they want to do. But I lost that realtor because of it, just because that client was unhappy. And I think it speaks to the fact that
you know, we're the experts and we've, we've got a council. Yeah, no. And you know, I think, but going back to the questions being asked, I think proactively our job is to, okay, investor, you've owned it for X. Okay. Well, you probably have capital gains. Have you explored this? And a lot of times people are like, what is that? And I'm surprised a lot of investors don't know what that is. So you can't just assume, you know what they say. Yes. Talk to me about,
exchanges across state lines. Is there a difference that you have to be aware of if you're purchasing, say, here or you're selling here and you're purchasing in Florida? Are there anything that you need to worry about differently? No.
Most investment real estate in the U.S. is like kind to any other investment real estate inside the U.S. So a lot of the times we do see folks use 1031s because they're relocating, right? They're moving from Chicago to Florida. They have an investment property here in Chicago. That's going to be difficult to manage that three flat, you know, from Florida.
They're going to sell the three flat here in Chicago, do a 1031, get the tax deferral, and then buy a new investment property closer to their home in Florida. It's easier to manage. So state lines doesn't affect the 1031 rules or the process in any way. Now, one other thing I've noticed is there are these companies, and I don't know if IPX 1031 does this or not. If you have an investor who's selling a property, they want to go into a 1031,
they haven't been able to identify. There are these companies that do these ticks, these tenants in common, 1031 ownership interest. So they already have like-kind property. So they're ready to go. They're like, you know, turnkey, so to speak. Like, can you speak to that sort of product and how prevalent is it? Is that something that IPX 1031 does? Yeah. So 1031 companies like IPX, we don't provide replacement property options.
But we certainly see a lot of closings on the replacement side where clients are buying into these type of syndications. They used to be structured as ticks. Maybe you're dating yourself. I am. I'm so dating myself. He is old. I'm very old. They've now, probably over the last 10 years, and there are definitely still tick structures. I'm just giving you a hard time. But most of those syndications are now done through what's called the Delaware Statutory Trust.
A structure, a DST, I don't know if that sounds familiar. It does a little bit. Yep. So there is these, they call them syndicators or sponsors. They're essentially real estate companies that go out, they purchase a portfolio of properties, they put them in this trust. And then years ago, the IRS ruled that a beneficial interest in a DST is the same thing as a tick interest, like kind to an interest in real property. So they go out and sell these properties.
to 1031 buyers. It's a replacement property option. So you could sell your three flat and buy an interest in a DST. Now you own a percentage interest in this portfolio of properties and you essentially receive your portion of the rent, you know, from the properties in that portfolio. Um,
Um, it is, uh, the only kind of 1031 friendly fund that's out there because I oftentimes get the question like, oh, can I sell my three flat and buy into a REIT or can I buy stocks or something like that? None of that qualifies. If you're looking to buy into a portfolio of properties, this really is the only option. Um,
which is either a DST or a TIC structure. So if you have a client who's at IPX 1031 and who's at that 45-day period and has not identified, do you bring that up to that person that there are these options? Or do you leave it up to the client to figure that out on their own? It depends. So usually if they come to me and say, hey, I'm having trouble finding replacement property, I often say, what are you looking for?
right? What type of property, what look, you know, what area, um, I might be able to connect them with a broker that, you know, deals with whatever they're looking for. But if they've kind of explored all of their options and then they say, is there anything else that, you know, I could possibly do, you know, what's an another option other than buying like just, just a property, um, you know, standalone property, then I do bring it up. It's not something that we like
technically sell um but i do throw it out there as a replacement property option got it so obviously with the 1031 the whole idea is to keep deferring paying taxes is there a point where there's enough because you're going at the same price or greater right so you're you might have more and more taxes is there an amount um max that you can defer at one point or is it just kind of
There's not. Yeah, there's no max amount that you can defer and there is not a limit to how many 1031 exchanges you can do per year. That's the question I often get. So our kind of cute and funny slogan in the 1031 world is swap till you drop. Oh, that's cute. Because that's about as funny as we get in the tax world, by the way.
But the overall kind of benefit and goal when you're thinking from about 1031s from an estate planning perspective is once you pass away, you know, it's a tax deferral. But once you die, whoever inherits the property avoids all the taxes that you've been deferring throughout.
your life. Because there's a step up. There's a step up in basis. Oh, interesting. Yeah. So depending on the client and their goals and how old they are, sometimes they can't really afford to cash out because they've been exchanging for so long. There's a lot of profit built into their real estate portfolio and they're getting a little bit older. So they know that in the next 10, maybe 15 years, they'll be able to
pass that portfolio to their kids, essentially tax-free. With the step-up. With the step-up basis. So that's interesting. So like who keeps track? Like if individual A has sold 15 properties in a 1031, the initial one was at a million and now the last one was at 14 million, like-
Who's keeping track of where it started to where it ends? I mean, I'm assuming the accountant, it's not you guys. It's definitely not us. Hopefully it's their CPA, right? The reason, as you said, step up in basis, the reason it's a tax deferral and not to get too in the weeds on accounting, the reason it's a tax deferral is because the basis and the property that you're selling essentially follows you into your replacement property.
Right, so it is specified on your tax return every time you're doing an exchange and every time you're selling a piece of property because the basis is then also affected by depreciation and improvement.
It gets technical. Yeah, most accounts are pretty good to keep track of that. So swap until you drop is actually the greatest strategy because once you drop, your beneficiaries inherit the step up and all of that deferral is gone. All that deferral becomes a tax avoidance. That's crazy. That is nuts. Interesting. And I'm sitting here thinking, well, lenders have a slogan. You have a slogan. You know, marry the home, date the rate. Yeah. That's so annoying. Yeah.
Now I'm like, now I got to figure out agents. We need a slogan. Yeah. I don't know what that would be. Maybe I'll ask Chad GBT to help me out. So is there, what's the biggest mistake you find investors make when they're going, when they're starting to go? Are there any? Like, do you find that you're like, why'd you do that?
Yeah, I would say not letting anybody know, your realtor, your attorney, your CPA, not letting your team know that you're doing a 1031 exchange. Not only can you possibly miss the opportunity if you close without getting it set up, but you're not giving your team enough time to find you replacement property.
You know, like I said, the 45 day window, those identification rules are the number one reason why we see exchanges fail. So you want to give your team as much time as possible to find that great replacement property for you. And all you could do is really just plan ahead.
But it's phenomenal for realtors because obviously there's another property to purchase. There's another commission to be had because you need to do it for the 1031. So it's great for realtors. So that gets me to who are your good referral sources? Like who are the people that you're looking to know about this who are repetitive referral sources that you see in your sphere? Yeah.
I also cover Indiana and Wisconsin, along with Illinois. So it kind of depends on the market. But specifically in Illinois, real estate attorneys are my number one referral sources. But also realtors and commercial brokers are a close second. And then it's really anyone from a wealth management advisor, CPAs, sometimes lenders, but not too much.
Those are the main ones. Okay. So real estate attorneys are the best referral source, even more than CPAs. Yes, because real estate attorneys are on the front lines when there's a sale taking place. As a realtor, even you would know ahead of time before there's a buyer in place that someone wants to sell their property. So that's often the best time to bring up an exchange at the point of listing.
Not enough clients let their CPAs know, like, hey, I'm selling some property. Any advice you can give me? They often tell them afterwards. So we don't get as many deals from CPAs as we do with attorneys because you're on the front lines when there's a sale taking place. Yeah, it is literally in our checklist now. We cannot close on a deal until it's been discussed with a client. Obviously, we're not discussing it on like an owner-occupied deal, but any investment deal, we try to do that. That's really great. Interesting. That's really great.
Well, what is the number one piece of advice you give for investors listening that may have not known about 1031, have learned all these things? What's one of the biggest piece of advice you would give them? I would say if you haven't done an exchange and you're planning on selling investment real estate this year, look into it. Ask some questions. Especially if you're selling and buying, there's no reason not to do a 1031 exchange. You really want to weave 1031s into your overall tax strategy if you're selling and buying.
If you're not sure what you're going to purchase, and that's sometimes the hindrance to like, I don't know if I want to sell this property because I have some great cash flow, even though I'm getting this great offer, what am I going to do with the money? I have this huge tax liability. Then you want to talk to your trusted advisors to help you really find that great property and source replacement property. See what's out there. I mean, there could be some really great deals where you're getting the tax deferral, but now you're also getting a bigger, better property. Okay.
Got it. One other nuance that I've seen done is this reverse 1031 where the person ends up buying before they sell. That's possible, correct? You can do a reverse 1031. It is. Yeah. So I think it was in 2000, maybe it was 2002. My general counsel is...
probably listening to this shrieking that I don't know this, but in the early 2000s, there was a specific revenue procedure that came out that gave us guidance for reverse exchanges. So you'd be in a reverse exchange scenario if you are buying your replacement property before you sell your old property. Let's say you don't have a seller or a buyer for your old property and you found the perfect replacement property. Or maybe you do have a buyer for your old property and the buyer says, my financing fell through. I need
30 more days, and you've already locked in on your purchase and you have a closing date for that. So lots of different scenarios where that can come up. Absolutely a great tool. It is a little bit more complicated and a little bit more expensive as far as our fees are concerned. So you're probably not in a situation where you want to do a reverse exchange, but if you have to, it is a great tool to use and you have to get us involved prior to the closing of the purchase. Prior to closing of the purchase. Got it. Got it.
That's interesting stuff. And then if you have a client who does a 1031 and for whatever reason, the 45-day period or the 180-day close period, and they forfeit it, they don't get back the fees. The fees are stuck with...
With IPX 1031, that's the cost of doing business, so to speak? Yeah. So we charge a nominal flat fee up front to open the 1031 account, to hold the funds, draft the 1031 documents for the sale, coordinate with the closing agent. That fee is paid whether you buy replacement property or not. And then we have a small fee that we charge on the purchase side as well for handling that side of the transaction. Great. Got it.
Well, this has been very informational. I think, you know, I knew high level the 1031 and how it was used in the deadlines, but this has opened my eyes a lot with the further, you know, the reverse exchange. I didn't really know. Yeah. I mean, it's no joke and you really do need this as a
as a tool in your arsenal. I know you're doing a lot of transactions on a yearly basis. So if we have someone listening to the pod who's interested in getting more information, why don't you let everyone know what's the best way to contact you? What's your preferred way of getting contacted?
and how they can reach you. Yeah, cell phone or email is the best way to contact me. My email address is Anna.Barsky at IPX1031.com. You could also reach out to these two for my contact info. Awesome.
Well, we really appreciate you coming on, and this was a really nuanced topic, and I think hopefully our listeners got a lot of good information and some ideas for 2026 and beyond. I agree. Thank you so much. Thank you for having me. This was fun. Well, until next time, this is The Fine Print in Real Estate. I'm Amber Kardosh.
at Properties Christie's International. I don't know where I work. And I am David Frank, managing member of the David Frank Law Group. Anna, thank you so much for coming on. Thank you. We'll see you next time.