The 411 on 1031

What is a 1031 Exchange?

A 1031 Exchange – named for section 1031 of the Internal Revenue Code – is a way for investors to defer capital gains tax when exchanging one investment for another of “like kind.” In the real estate world, that means that an investor can sell their investment property, use the funds for investment in other real property, and defer payment of any capital gains taxes that would otherwise be due.

“Like-kind” investment

The definition of like-kind within real estate is very broad. It is interpreted to allow exchanges of any type of real property for any other. The number of parcels is immaterial; for instance, one apartment complex can be exchanged for five single family dwellings. The qualification is that it must be investment property! An owner cannot use 1031 exchange to replace their principal residence.

Qualified Intermediary

It is imperative for a 1031 Exchange that the principal does not have access to the funds in between the sale of the first property and purchase of the replacement property. If the money reaches the principal at any point, they will lose the opportunity to defer their capital gains tax. For this reason, it is far better to over-communicate than under-communicate with escrow on the sale of the initial property that it is part of a 1031 exchange and the money is not to be wired to the seller.

Instead, the funds must be held by a Qualified Intermediary (QI). There are numerous companies offering this service. It is important to vet QI candidates carefully as they will be responsible for all the funds in between the sale of the first property and purchase of the replacement(s).

Timelines to identify and close

After the close of the sale of the first property, the principal has up to 45 days to identify potential replacement properties and up to 180 days to close escrow on the replacement(s). There are stringent and complex rules around the identification of properties – below is a rudimentary summary for informational purposes only. Note that this should not be used as a substitute for legal advice or the advice of a tax accountant!

What else do I need to know about 1031 Exchange?

If you are pondering a 1031 Exchange, consult with a tax, financial, or legal professional for details about what options are available and best for your particular situation. The information below is for general educational purposes and cannot be considered legal or tax advice.

What counts as identifying a property?

Replacement properties are identified:

  • De facto by executing a contract to purchase the replacement property, or
  • When specifically named in writing submitted to the QI

Are there limits on how many properties I can identify?

Yes. The most commonly known options are:

  • Up to three properties can be identified, any or all of which can be purchased
  • Any number of properties can be identified if the market value does not exceed double the value of the original property
  • Any number of properties can be identified if the principal closes acquisition of 95% or more (by market value, not by units) of the identified properties

What happens if I miss the deadline to identify or close?

If you miss the deadline to identify or close, or do not properly identify the replacement properties, the ability to defer the capital gains tax on the transaction is lost.

Does the replacement property have to be the same value as the initial property?

To defer capital gains taxes, the replacement property can be the same value or more as the property sold. If it is purchased for less than the sale amount of the original property, the entire difference is subject to capital gains tax (the basis is considered $0 as the actual cost basis is rolled into the replacement property).

Also note!

The exact same taxpayer, whether an individual, group of individuals, or entity, must be the seller of the initial property and buyer of the replacement property in order to use a 1031 Exchange.

Transferring Property Tax Bases in California

Property Tax Portability

Propositions 60, 90, and 110 each allow a homeowner to transfer their base taxable value to a replacement property for their primary residence, resulting in much more affordable payments.

Proposition 60

Proposition 60 can be used to transfer a homeowner’s tax base within the same county. It is specifically for seniors. The requirements for eligibility are as follows:

  • The property to be sold and replacement property must be in the same county.
  • Proposition 60 is for a change in principal residence – therefore, the property sold and the replacement property must both be owner-occupied.
  • One person on title must be age 55 or older
  • The benefit can be used only once. A single owner or a married couple, joint tenantship, etc. can only use the benefit one time; not once per spouse.
  • The replacement property must be of equal or lesser value to the property sold, within the following parameters:
    • If the replacement property is purchased before the sale of the original property, the replacement property can cost no more than 100% of the sale price of the original home.
    • If the replacement home is acquired within one year after the sale of the original property, it’s price can be no more than 105% of the initial sale value.
    • If the replacement home is acquired between one and two years following the sale of the original property, it’s price can be no more than 110% of the original sale price.
  • The transactions must be within two years of one another. If this limit is exceeded, the benefit is lost.
  • If the value of the replacement property is too high, the benefit cannot be partially applied, it is lost entirely.

Proposition 90

Proposition 90 allows counties to accept transfers of property tax base from one county to another. The requirements are the same as for Propositions 60, except for the requirement that both properties lie within the same county. Instead, both properties must be in counties that have opted in to Proposition 90. At present, these counties are:

  • Orange
  • Los Angeles
  • Riverside
  • San Bernardino
  • San Diego
  • Ventura
  • Alameda
  • Santa Clara
  • San Mateo
  • Tuolumne

Proposition 110

Proposition 110 allows a similar transfer in tax base, with the same requirements on occupancy and value, for the benefit of permanently and severely disabled persons. A permanently and severely disabled person is described as: “any person who has a physical disability or impairment which results in a functional limitation as to employment, or substantially limits one or more major life activities of that person, and which has been diagnosed as permanently affecting the person’s ability to function.”

Someone who has used their Proposition 60/90 benefit in the past who subsequently becomes permanently and severely disabled is eligible to use their benefit under Proposition 110.

To establish eligibility for Proposition 110, the homeowner’s physician must complete and sign form BOE 62 A to certify their eligibility.

All You Need to Know About Power of Attorney

What is Power of Attorney?

When someone gives Power of Attorney to another person, they are authorizing that person to act on their behalf in specific legal, medical, or business matters. The person giving Power of Attorney is considered the grantor, and the person receiving POA becomes attorney-in-fact.

How is Power of Attorney Granted?

Your legal or estate planning professional can help prepare a Power of Attorney document. Specificity is key – they will use terms such as “convey, mortgage, encumber, or execute” to declare exactly what the attorney-in-fact is being authorized to do. The POA must be signed and notarized, then recorded in the office of the County Recorder. If any Real Estate related transaction is to rely on the Power of Attorney, it must be recorded in the County in which the property lies.

For Real Estate Transactions

Sale of a property

The grantor’s name (on the POA) must be identical to the grantor’s name as appearing on title to the property. Your title company can help you determine the exact name and vesting of any owner on title to a property. When signing the Grant Deed for the sale, the attorney-in-fact’s name must be identical to his or her name on the POA.

New loan (encumbrance) on a property

The same requirements as a sale must be met with regards to the matching of names between the recorded Power of Attorney and the documents executing the transaction. The borrower will also want to confirm with the lender that they accept POA, and what type of POA would be needed – general or specific

How long does POA last?

There is no expiration date for a Power of Attorney unless explicitly stated on the document. However, title companies often require additional documentation if the POA is more than a year old when a transaction is to close. This is typically done with “Affidavit confirming authority under Power of Attorney.”

What else do you need to know?

  • When a title company insures a transaction, fraud prevention is a priority. They may ask for more information, such as why a POA is being used for a particular transaction.
  • Title companies will not insure the act of an attorney-in-fact if they are conveying the property to themselves or giving it away as a gift.
  • Power of Attorney is generally not accepted when the property is held in a Trust

Remember to always consult a legal or estate planning professional when considering the use of a Power of Attorney! An untrustworthy attorney-in-fact could fraudulently sell or encumber your assets or use your credit.

Why Human-Centered Service?

Experience the Human-Centered difference

People Matter

In Title, it’s easy to look at our work as strictly transactional. Any given title company works through so many files, there is a temptation not to look at them as more than just that: files.

We lose sight of our mission and our passion if we forget that behind every file is a home. What we are handling are nothing less than the places where people will raise their families and build the lion’s share of their long-term wealth.

My mission statement, Human-Centered Service, is my resolution to treat every person and every family who relies on my services with the respect and care that they deserve. It’s my promise to advocate for them when deals get tricky. It means that I’m always looking for large or small ways to make their lives better.

The goal: to make the world a better place, one act of service at a time.

Educate, Advocate, and Empower

Like most businesses during a time of explosive technological growth, the entire real estate industry is in a state of constant, rapid evolution. This comes with its share of challenges, but plenty of benefit. It makes it ever easier for companies to be transparent and accountable to their customers; to make their resources available to educate and empower the families that trust them.

In service of education, we are proud to make a wide array of general real estate information available to the public, and to offer market-specific updates to help people make informed homeownership decisions. Look for continuing educational material on this blog and through various other media.

We pursue transparency and accountability, especially through our open-door policy up to the highest levels of our management. This means that a customer can always speak directly to management to ensure they are getting the best service and all their needs are addressed.

We also seek to give back to the customer with some of the most aggressive discounts in the title industry – a 25% discount, posted and fully compliant, on homeowner’s policies for transactions involving a principal who is a senior, a veteran, or a first-time homebuyer.

A Collaborative Mission

One of the best ways we can improve the lives of homeowners and prospective homeowners is in collaboration with the other professionals who serve them.

This involves helping agents to take the best of modern technology, tools that support and supplement human interaction, and fight against platforms that seek to take humanity out of the equation. It means connecting them with the people and services that will work alongside them to provide standout, life-improving service to their clients, from the first appointment into years beyond the close of escrow.

Human-centered service means being an active part of a professional team providing real, authentic support to homeowners, deeply rewarding to all involved.