Exchange Requirements
1031 Exchange Qualifying Factors
Property must be like-kind, nearly all real estate is like-kind to other real estate.
Property cannot be a personal primary residence or vacation home.
The same taxpayer who sells must also purchase.
The 1031 Exchange needs to be disclosed to both the buyer of the relinquished property and the seller of the replacement property.
Replacement property must be identified within 45 days of the sale of the relinquished property.
Replacement property must be purchased within 180 days of the sale of the relinquished property.
The price of the replacement property must be equal to or greater than the sales price of the relinquished property to avoid taxable gains. Any amount/debt not re-invested is considered “Boot” and is taxable.
The relinquished and replacement properties must be held for investment or use in a business.
If the seller of the replacement property is related to you by familial or business association, their eligibility as a seller requires special attention to potentially qualify.
A property within the U.S. may only be exchanged with other real estate within the U.S. A property outside the U.S. may only be exchanged with other real estate outside the U.S.
Other Considerations
If an identification form has been submitted, the only way to withdraw funds from your exchange is to close on identified properties or wait for the expiration of the full 180-day exchange period.
Some exchangers may choose to not identify if they do not find a suitable property. If the 45-day identification period ends and no replacement properties are identified, the exchange closes and funds are returned to the exchangor as taxable boot.
Deadlines
IDENTIFICATION PERIOD
From the closing date of the sale of your relinquished property, you have 45 days to identify any replacement properties you plan to purchase.
EXCHANGE PERIOD
From the closing date of the sale of your relinquished property, you have 180 days to close on replacement property.
Essentials
45 Days
You have 45 days after the sale of your relinquished property to identify your replacement property(ies). Identification of replacement properties must be unambiguous, using a legal description or physical address. It must be in writing, dated, signed, and received by your QI within the 45 days. The 45-day requirement is strictly enforced with no option for extension.
180 Days
You have 180 days after the sale of your relinquished property to purchase your replacement property(ies). The 180-day requirement is strictly enforced with no option for extension. Additionally, your replacement period could be shorter if your tax return due date is prior to the expiration of the 180 days, if that is the case you will want to file an extension on your tax filing.
ID Rules
The IRS provides three rules in which you can identify your replacement property(ies). The most common being the 3-property rule, simply put you can identify three properties. The 200% rule allows you to identify more than three properties so long as the fair market value of all properties does not exceed 200% of the sales price of your relinquished property.
Like Kind
For a 1031 exchange to be valid, your properties must be like-kind. As it pertains to real estate, all real estate is like-kind to other real estate. Some examples would include: an apartment complex exchanged for a cell tower easement; an office building for farm land; or a rental home for water rights. Generally speaking, the only real estate that does not qualify under a 1031 exchange is a vacation home and personal primary residence.
ID Rules to Purchase
You have the option to purchase one or all of the properties you identified, you are not required to purchase all identified properties. Identifying more than one property just provides you with more options to ensure you have a replacement property within the 180-day exchange period. Additionally, you need to state how many properties you plan to purchase.