1031 Exchange

A tax-deferred exchange is a method by which a property owner trades one or more relinquished properties for one or more replacement properties of "like-kind" qualification, while deferring the payment of federal income taxes and some state taxes on the transaction. 

 

Anyone who own's investment property or whom is interested in investing should be aware of this unique tax deferment process. Below is a quick outline of the basics, as this process is very detailed it is best to hire a professional who can help you facilitate your residential investment plan.

 

1031 EXCHANGE RULES

  1. Qualifying- First we need to make sure that your property qualifies for tax deferred treatment.
  2. Proper Purpose – Second the use of both the property being relinquished and the replacement property are for investment purposes. Property obtained for immediate resale will not qualify, nor will primary/personal residence.
  3. Like Kind Rule – The replacement property must be “like kind” to the relinquished property. There are two basic rules:
    1. 1. The total purchase price of the replacement "like kind" property must be equal to, or greater than the total net sales price of the relinquished, real estate, property.
    2. 2. All the equity received from the sale, of the relinquished real estate property, must be used to acquire the replacement, "like kind" property.
  4. Exchange Requirement – the relinquished property must be exchanged for another property; it can not be sold for cash, nor can one keep a portion of the proceeds.
  5. Qualified Intermediary - The proceeds from the sale must go through the hands of a "qualified intermediary" (QI) and not through your hands or the hands of one of your agents or else all the proceeds will become taxable.

TIME LINES

Identification period: 45 days after the sale date of the reliquished property, the selling party must identify other replacement properties that one proposes or wishes to buy. More than one property may be selected, however conditions to apply (see below). This period is scheduled  exactly 45 days from the sale date of the relinquished property. This 45 day time line is not extendable in any way, even if the 45th day falls on a Saturday, Sunday or legal holiday.

Property Identification Rules:

  • 3-Property Rule: you may identify up to 3 potential replacement properties, without regard to their value
  • 200% Rule: Any number of properties may be identified, but their total value cannot exceed twice the value of the old property
  • 95% Rule: you may identify as many properties as you like, but before the end of the exchange period you must acquire replacement properties with an aggregate fair market value equal to at least 95% of the aggregate fair market value of all the identified properties.

Exchange Period: 180 days after the sale date of the relinquished property, the selling property must receive the replacement property. This is referred to as the Exchange Period under 1031 exchange (IRS) rule. This period ends at exactly 180 days after the sale date or on the due date for the person's tax return for that taxable year when the transfer of the relinquished property occurred (whichever is earlier). Per the 1031 exchange (IRS) rule, the 180 day time line has no exceptions and is not extendable in any any way, even if the 180th day falls on a Saturday, Sunday or legal holiday.