Three "Must Know" Things About 1031 Exchanges

A 1031 exchange can be a powerful tax deferral tool for real estate investors. However, to ensure the validity of any exchange in the eyes of the IRS, three straightforward rules must be followed. The margin for error is not kind, either. The smallest misstep can result in the IRS invalidating the entire transaction and demanding immediate payment of capital gains tax.

Like-Kind Exchange

In every circumstance, the property the investor is selling and buying must be “like-kind.” Note that this does not mean identical. Rather, “like-kind” is a federal tax phrase that relates to the nature of the real estate while it is held by the investor. The key is whether the property was (and will be) held for business or investment purposes.

45-Day Notification

An investor must identify replacement property within 45 days of selling their relinquished property. This notification can be as simple as providing a legal description to the qualified intermediary (the entity holding the proceeds from the sale of relinquished property). Also important to know, an investor can identify more than one potential replacement property, subject to either the Three Property Rule, the 200% Rule or the 95% Rule. Missing this 45 day deadline by even one day can put the entire exchange in jeopardy.

180-Day Closing Requirement

As the name implies, the investor must close on one (or more) of the nominated replacement properties within 180 days of selling the relinquished property. Like with the 45-Day Notification rule, missing this deadline by even a single day can call into question the validity of the entire transaction and incur immediate capital gains obligations.

To find out how we can help you find and close on your next 1031 exchange property or to learn more about the exchange process and our qualified intermediary services, please visit our website.