The Basics of 1031 Exchanges: What You Need to Know Part I

Deciding to use a 1031 exchange to engage in real estate investment can be an exciting opportunity but only if you understand all of the terms and rules associated with such an exchange. There are several key requirements involved in a 1031 exchange. These are known as the same taxpayer rule, property identification rule, the timeline for purchasing the replacement property, trading up, the hold time, and related party transaction regulations. Read on to learn more about how each of these influence 1031 exchanges and what you need to know in order to be successful when you initiate a 1031 exchange.

Same Taxpayer

The name appearing on the title of the property and the tax return need to be associated with the title holder that buys the property. A single member limited liability company, for example, can be considered a pass through to the member and this LLC might sell and the member may purchase in their own individual name.

Property Identification

After purchasing the initial property the exchanging individual has 45 calendar days in order to identify the accommodator or the address of the potential replacement properties. If the individual is instead using reverse exchange, however, there are 45 days to submit a final property list for the sale or purchase. There are three rules within this that are worth knowing. The 200% rule means you can identify four or additional properties so long as the value of those properties doesn't exceed 200% of the total property sold, the three property rule which allows you to identify any particular three properties regardless of their individual value, and the 95% exception rule which means that if the value of a property exceeds 200%, then 95% of what is identified needs to be purchased.

Replacement

In addition to the 45 day calendar rule relating to closing on the first property, you also need to know that you need to close on the replacement property within 180 days from the same date. The 45 day and the 180 day date are not separate as the 45 day window falls within the same 180 calendar days.

Trading Up

The equity of the property and the net market value of the property sold have to be greater to or equal to the replacement property to defer the complete taxes. Otherwise the individual exchanging the property has to pay on the difference.