Thinking about selling a rental and rolling the proceeds into another property without paying capital gains this year? A 1031 exchange can help you keep your money working in Jensen Beach if you follow the rules. You want clarity on what qualifies, how the timelines work, and what to avoid so your deferral stays intact. This guide walks you through the essentials, highlights local factors, and gives you a simple plan to move forward with confidence. Let’s dive in.
What a 1031 exchange does
A 1031 exchange lets you defer federal capital gains tax when you sell real property held for investment or business use and buy qualifying replacement real property. It is a deferral, not an elimination. If you later sell without another 1031, the deferred gain and any depreciation recapture can become taxable.
Only real property qualifies for 1031 treatment after the 2017 tax law change. That means no personal property exchanges. Keep good records and be ready to show the property was held for investment or business, not primarily for personal use or for sale.
Who and what qualifies
You must exchange real property that you held for investment or productive use in a trade or business. Common Jensen Beach examples include single-family rentals, coastal condos held as rentals, small multifamily, commercial storefronts, and land held for investment. Primary residences and inventory or flip properties do not qualify.
The same taxpayer who sells must also buy. If an LLC sells, that same LLC should acquire the replacement. Changing ownership form midstream can break the exchange. Special rules apply to disregarded entities and partnerships, which is why planning with your CPA is so important.
A Qualified Intermediary, or QI, is usually required. The QI holds the proceeds so you never receive or control the cash. You need a written exchange agreement in place with the QI before the sale of the relinquished property closes. Missing this step can turn a planned exchange into a taxable sale.
Key points:
- Only real property held for investment or business qualifies.
- The selling and buying taxpayer must match.
- Use a QI and document your investment intent.
Deadlines you cannot miss
Two hard deadlines drive every exchange. You have 45 days from the sale closing date to identify your potential replacement properties in writing to your QI. You have 180 days from that same closing date to acquire the replacement property or properties and finish the exchange. These are calendar days, including weekends and holidays, and they cannot be extended except in limited federally declared disasters.
Identification rules made simple
You must identify replacement properties in a written, signed notice delivered to your QI. Each property needs a clear description, such as an address or legal description. You can use one of three rules:
- Three-property rule: Identify up to three properties, regardless of value.
- 200% rule: Identify more than three properties as long as their total fair market value does not exceed 200% of the value of what you sold.
- 95% rule: If you exceed 200%, you can still qualify by acquiring at least 95% of the total value you identified.
Local identification examples
- Three-property example: You sell a Jensen Beach rental on June 1. By July 16, you may identify up to three replacements, such as a Port St. Lucie duplex, a Stuart condo, and a small apartment building in West Palm Beach. You can close on one or more of them by day 180.
- 200% rule example: If your relinquished property’s fair market value is $300,000, you can identify multiple options with a combined value up to $600,000. If you identify more than $600,000, you must acquire at least 95% of what you identified to keep the exchange valid. This route is complex and risky without expert guidance.
Exchange types you might use
Most local investors use a forward, or deferred, exchange. You sell first, the QI holds the funds, and you buy your replacement within the timelines.
A reverse exchange is an option when the perfect replacement shows up before you can sell. A special titleholder takes temporary title and you still have 180 days to complete both legs. Reverse exchanges are more complex and cost more.
An improvement exchange uses your exchange funds for renovations or construction on the replacement during the exchange window. It requires careful structuring. A simultaneous exchange closes both the sale and purchase the same day, which is rare but possible.
Taxes, boot, and basis
Any cash you receive or non-like-kind property you take is called boot. Boot is taxable up to the amount of gain. Mortgage boot happens when you reduce your debt without adding new debt or cash to cover the difference. For example, if you had a $400,000 loan on the property you sold and only take on $200,000 of debt on the replacement without adding cash, the $200,000 shortfall can be taxable.
Your basis in the replacement generally carries over from the relinquished property, adjusted for any additional cash you put in and reduced by any boot you receive. Basis affects future depreciation and the tax you may owe when you eventually sell without exchanging, so keep accurate records.
Reporting and documentation
You will report the exchange on IRS Form 8824 with your tax return for the year you transferred the relinquished property. Even if you fully defer gain, the IRS still expects the form. Keep copies of your exchange agreement, identification notice, closing statements, and support for your basis and depreciation.
Jensen Beach and Florida factors
Florida does not have a state individual income tax, so your federal 1031 deferral is not complicated by state income tax in most individual cases. Always confirm your situation with a Florida CPA, especially if you are using an entity or have multi-state filings.
Coastal properties in Jensen Beach often come with flood zone considerations and higher insurance costs. These affect cash flow and the size of any replacement mortgage, which matters for avoiding mortgage boot. Review HOA and condo rules for rental restrictions, caps, or minimum lease terms that could affect your investment plan and documentation of intent.
Short-term rental rules and permitting vary by municipality and county. Make sure the use you plan is allowed, and register for any required local or transient taxes. Strong records of rental activity, leases, and management help show investment intent, especially if a property previously had personal use.
Local market dynamics can make timing tricky. If the right coastal replacement appears before your sale closes, consider whether a reverse or improvement exchange structure fits your needs. Early planning with your QI, CPA, attorney, and lender reduces timing risks.
Step-by-step game plan
- Decide if a 1031 meets your goals, and talk with your CPA and an experienced QI before you list.
- Select and engage a QI, and sign the exchange agreement before your sale closes.
- Close on your sale. The QI receives the funds.
- Identify your replacement property or properties in writing within 45 days.
- Close on the replacement within 180 days. The QI wires the funds.
- File Form 8824 with your tax return for the year you sold the relinquished property.
Documents to gather early
- Title, deed, and entity documents for the property you plan to sell.
- Sales contract and settlement statements.
- Addresses or legal descriptions of your target replacements and draft purchase terms.
- Current mortgage statements to plan debt replacement.
- Rental records and management agreements that show investment use.
- Contact details for your QI, CPA, attorney, lender, and closing company.
Who to involve and when
- Qualified Intermediary: engage before your sale closes.
- CPA or tax advisor: model gain, basis, depreciation, and potential boot.
- Real estate attorney: review title, entities, and help with reverse or improvement exchanges.
- Lender: align on timing, approvals, and debt requirements early in the process.
Costs and tradeoffs
- QI and attorney fees add to transaction costs, especially for reverse or improvement exchanges.
- Extra complexity may be worth it if it helps you secure a desirable Jensen Beach or nearby replacement and preserve your tax deferral.
Red flags to address early
- Changing ownership entities between sale and purchase.
- Planning a reverse or improvement exchange.
- Involving a related party in any leg of the transaction.
- Expecting to receive cash at closing or to reduce your debt without adding cash.
- Converting a personal or vacation home to investment use shortly before selling.
Example timeline for a local investor
You sell a Jensen Beach condo used as a true rental on June 1 and your QI receives the proceeds. By July 16, you identify a Stuart condo, a Port St. Lucie duplex, and a small West Palm Beach apartment under the three-property rule. You work with your lender to match or exceed your prior mortgage amount, adding cash if needed to avoid mortgage boot. You close on the duplex on September 10, well within the 180-day window, and your QI wires the funds to the closing agent. You keep your exchange package and file Form 8824 with your return for the year of sale.
Move forward with confidence
A clean 1031 exchange comes down to early planning, strict attention to the 45-day and 180-day timelines, precise identification, and the right team. With Jensen Beach’s coastal dynamics and condo considerations, having a seasoned local guide alongside your CPA, attorney, and QI makes a real difference. If you are weighing whether to exchange, sell, or hold, let’s talk through your options and map out a plan that fits your goals.
Ready to start a conversation about your Jensen Beach investment move? Connect with Barbara C Smith to outline a smart path forward.
FAQs
What counts as like-kind real property for Jensen Beach investors?
- Real property held for investment or business use, such as rentals, multifamily, commercial, or investment land, qualifies for 1031 treatment.
How do the 45-day and 180-day deadlines work in a 1031 exchange?
- You must identify replacement properties in writing by day 45 and complete the purchase by day 180, counted from the date your sale closes.
Can I use a 1031 exchange for a primary home I sometimes rented?
- Primary residences do not qualify, and you need clear evidence the property was held for investment if it had any personal use.
What is boot and why is mortgage boot a risk?
- Boot is taxable cash or non-like-kind property you receive, including reduced debt not offset by new debt or cash on the replacement.
Do Florida taxes change how a 1031 works for individuals?
- Florida has no state individual income tax, so your 1031 is generally a federal deferral, but confirm details with a Florida CPA.
Do I have to report a fully deferred exchange to the IRS?
- Yes, you generally file IRS Form 8824 for the tax year you transferred the relinquished property, even if no gain is recognized.
