The Rules & Terms of a 1031 Lease

If you are just now learning about what a 1031 lease is, you may be curious and considering participating in this real estate opportunity. Overall, a 1031 lease entails a property being traded in exchange for another by an investor. There are certain rules that must be abided by in order for this transaction to be successful. In the article here, we have answered a few common questions people have about the 1031 lease, that can help them decide if it is the right next investment decision. 

When the term “like-kind” is used, what does this exactly mean?

A property can be utilized in a trade, but must be replaced with a property of like-kind. While the initial assumption is that a trade has to include two properties of the exact same type, that is actually not the case. An investor can trade a multi-story home, for a business office or condominium. The term is much more broad that it seems, which allows more wiggle room for the investor and which property they can exchange in place of their current one. 

What are the rules that an investor must abide by during the transaction?

There are a few key rules that must be followed during a 1031 exchange. When an investor is considering which new property to choose, they can designate more than just one property. However, if the investor decides to do this, he or she must not break any of these rules: 

  1. An investor can designate three new properties of any value, but he or she must uphold an intention to seal the deal on one, or more.
  2. An investor can designate more than three new properties with an accumulative value over 200% of the exchanged property. But, the investor must be aware that 95% of the market value for the properties has to be obtained. 
  3. An investor can designate more than three new properties, but the accumulated value cannot exceed 200% of the exchanged property market value. 

Can an investor exchange a property for just about anything else?

While the term “like-kind” is generous, there are exceptions to the trade. An investor cannot trade a property for stocks, partnership shares, notes, bonds or certificates of trust. Additionally, the investor may not trade their initial property for a personal home for themselves, property outside the country, or a stock-in-trade. A property investor can purchase a property, perform the necessary renovations and attempt to sell once this is complete. However, this property is now exempt from being exchanged in a 1031 lease. But, the upside is that the property can be utilized in a stock-in-trade. 

When considering your options for real estate, go with what feels right for you. There are advisors and real estate professionals, like a lawyer with Tim Kassouni lawyer reviews  that are positive and an experienced real estate lawyer in Sacramento, CA, who can provide you with more information on the 1031 lease if you have questions or concerns. Do keep in mind that the 1031 lease does have time limitations, so you may want to hire a qualified intermediary to help keep the process moving forward, and to your benefit.