A 1031 exchange allow an investor to defer the payment of federal income taxes typically incurred by selling an investment property, as the profit from the property sale is used to purchase a ‘like-kind’ property.
Requirements
Like-Kind Property
The relinquished property (property being sold) and the replacement property (property being purchased) must be like-kind, meaning they must be similar in nature and character. For example, relinquishing a rental property for a new rental property.
Investment or Business Properties
1031 Exchanges can only involve investment or business property, personal property does not qualify.
45-Day Identification Period
Once the sale of the relinquished property is complete, you have 45-days to identify potential replacement property(ies).
180-Days to Close
Once the sale of the relinquished property is complete, you have 180-days to close on the purchase of the replacement property. This is not in addition to the 45 day identification period, both start from the date the relinquished property is sold.
Purchase Price
In order to defer all tax on capital gains, the price of the replacement property (ies) must equal or exceed the price of the relinquished property. You can choose to do a partial exchange, where the property you relinquish is worth more than the replacement property, but you will have to pay federal income taxes on the difference, which is also called the “boot.”
Mortgage
The mortgage amount on the Replacement Property(ies) must equal or exceed the mortgage paid off at sale of the Relinquished Property.
Same Taxpayer
The buyer of the replacement property must be the same legal entity as the seller of the relinquished property.
Qualified Intermediary
A Qualified Intermediary is required to hold the proceeds during the exchange. To successfully complete the exchange you cannot control the funds in any way.
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