## 1031 like-kind exchanges in Montana **Section 1031** of the Internal Revenue Code allows real-estate investors to defer capital gains tax by reinvesting sale proceeds in "like-kind" property. Montana investors use 1031 exchanges to grow portfolios + delay tax indefinitely. ## The basic concept **Without 1031:** - Sell investment property - Pay capital gains tax (federal + state) - Pay depreciation recapture - Invest remaining net **With 1031:** - Sell investment property - Reinvest gross proceeds in like-kind property - Defer all capital gains + recapture taxes - Use full proceeds for new investment - Continue deferring through subsequent exchanges - Step-up in basis at death (estate planning) ## Tax savings **Federal tax rates (2025):** - Long-term capital gains: 0%, 15%, 20% - Plus 3.8% NIIT - Depreciation recapture: 25% - State tax: varies (${s.name} specific) **Combined often 25-40%+ of gain.** **Tax deferral effective interest:** - Tax-deferred investment compounds - Like interest-free loan from government - Significant long-term advantage ## Qualifying property **"Like-kind" definition (post-TCJA 2017):** - Real estate ONLY - Held for investment / business use - Not personal residence - Not flip property ("holding for sale") - Not inventory - US property + US property (cannot mix US + foreign) **Like-kind interpretation:** - Most real estate qualifies as like-kind to other real estate - Apartment complex ↔ office building ↔ farmland ↔ raw land - Long-term lease (30+ years) treated as real estate - Specific to circumstances **No longer qualifies (post-TCJA):** - Personal property - Equipment - Vehicles - Aircraft - Specific tangible property - Major change from pre-2018 ## Property timing requirements **STRICT deadlines (no extensions):** **45-day identification period:** - 45 days from sale of relinquished property - Identify replacement property in writing - Specific identification rules: - 3-property rule (any 3 properties) - 200% rule (any number, total FMV ≤ 200% relinquished) - 95% rule (any number, must acquire 95%) **180-day exchange period:** - 180 days from sale of relinquished property - Acquire replacement property - Includes 45-day identification within - OR tax return due date if earlier - Cannot be extended **These are calendar days, not business days.** ## Qualified intermediary (QI) requirement **Critical:** - Must use qualified intermediary - QI holds proceeds during exchange - Cannot have actual / constructive receipt - Specific QI requirements - Specific procedures **QI cannot be:** - Your CPA / attorney (recent or current) - Family member - Employee - Specific disqualified persons **QI services:** - Hold sale proceeds - Coordinate exchange - Document compliance - Specific fee structure - Specific bonded protection ## Process **1. Plan exchange BEFORE selling:** - Engage QI - Specific exchange documents - Specific contract provisions - Specific timing analysis **2. Sale of relinquished property:** - Standard real-estate sale - Proceeds to QI (not seller) - Specific exchange language in contract - Specific assignment of rights **3. Identification of replacement (45 days):** - Written identification - Specific rules followed - Sent to QI - Specific deadlines **4. Acquisition of replacement (180 days):** - Standard purchase + close - QI funds purchase - Specific assignment of rights - Specific exchange language **5. Tax reporting:** - Form 8824 - Filed with tax return - Specific calculations - Specific procedures ## Boot — the catch **"Boot" = non-like-kind value received:** - Cash received (not invested) - Mortgage relief (debt of relinquished > replacement) - Personal property received - Specific other amounts **Tax consequences:** - Boot is taxable - Up to amount of gain - Reduces deferral benefit - Specific to amount + type **Avoiding boot:** - Reinvest all proceeds - Equal or greater value of replacement - Equal or greater debt on replacement - Specific structures ## Common types of 1031 exchanges **Forward exchange (most common):** - Sell first, then buy - Standard timeline - 45/180 day rules apply **Reverse exchange:** - Buy first, then sell - More complex - Different deadlines - Specific accommodation party - Higher cost **Construction exchange:** - Building improvements - Specific procedures - 180-day timing critical - Specific cost considerations **Build-to-suit exchange:** - Construction on replacement property - During exchange period - Specific procedures - Higher complexity ## Recent issues + considerations **TCJA 2017 changes:** - Personal property no longer qualifies - Real estate only now - Major change **Proposed legislative changes:** - Periodic threats to limit / eliminate - Cap on gains deferrable - Specific to political environment - Always check current law **Current uncertainty:** - Tax reform discussions - Specific to political administration - Strategic timing considerations ## Common mistakes **Procedural:** - Missing 45-day deadline - Missing 180-day deadline - Improper identification - Receipt of proceeds (constructive) - Inadequate QI selection - Specific document errors **Strategic:** - Inadequate replacement properties identified - Property fall-throughs - Inadequate due diligence - Cost considerations - Specific economics **Tax:** - Forgetting boot - Inadequate reporting - Specific entity issues - Specific basis tracking - ${s.name} state tax issues ## Costs **Typical exchange costs:** - QI fees: $750-$2,000+ - Attorney fees: $500-$3,000 - Specific expenses - Total typical: $2,000-$5,000 **Worth it for:** - $50K+ in deferred tax - Strategic portfolio building - Long-term tax planning ## Strategic considerations **Estate planning:** - Step-up in basis at death - Eliminates deferred tax - Heirs receive at FMV basis - Significant generational benefit **Multiple exchanges:** - Continue deferring - Build portfolio - Reinvest gains - Long-term strategy **Specific scenarios:** - Cash-out refinance vs sale - Specific tax timing - Specific market conditions - Specific portfolio strategy ## Same taxpayer requirement **Critical:** - Same taxpayer holds both properties - Specific entity requirements - LLC + entity considerations - Specific to ownership structure - Strategic planning needed ## ${s.name} state tax **State conformity:** - Most states follow federal 1031 - ${s.name} specific conformity - Specific state tax rates - ${s.name} reporting requirements **Some states impose:** - Withholding on sales - Non-resident withholding - Specific procedures - ${s.name} specific rules ## Vacation property + 1031 **Limited use:** - Generally personal use disqualifies - Specific safe harbor (Rev. Proc. 2008-16): - Held 24+ months - Rented 14+ days/year at FMV - Personal use ≤ 14 days OR 10% of rental days - Specific to circumstances ## When NOT to use 1031 **Sometimes selling outright better:** - Limited gains anyway - Cash needed for purposes other than reinvestment - Different investment direction - Specific tax circumstances - Estate basis step-up unavailable - Specific portfolio strategy ## What you should do If you're considering a 1031 exchange in Montana: PLAN BEFORE SELLING — exchange must be in place at sale closing. Engage qualified intermediary, real-estate attorney, + tax advisor early. Most Montana real-estate attorneys handle 1031 exchanges. QI fees + attorney fees small relative to tax savings. Strict deadlines unforgiving. --- *This guide is general information about federal + Montana law as of mid-2026 and is not legal or tax advice. 1031 exchanges are technical + time-sensitive. Talk to a licensed Montana real-estate attorney + tax advisor about your specific situation.*