IRC 1031 Exchange Rules

IRC §1031 TAX EXCHANGES

An IRC §1031 tax deferred exchange allows owners of real property to defer the recognition of a capital gains tax they would have recognized when they sold their property. Exchanging allows investors to reinvest money into new business or investment properties that would otherwise have been paid to the government as a capital gains tax. Tax deferred exchanges are not new — they have been available in one form or another since 1921, and in its current format since 1986.

Simply put, an exchange is structured as a sale, just like any other sale, and a purchase just like any other purchase, but with the inclusion of a qualified intermediary to structure the transactions as an exchange. Instead of paying a capital gains tax to the government, an investor is allowed to use that money toward the purchase of a new property. In order to obtain this benefit it is important to involve a qualified intermediary before you start your transaction

1031 EXCHANGE RULES

  • In order to qualify for an IRC §1031 tax deferred exchange properties must be held for productive use in a trade or business or for investment purposes.
  • The IRS mandates that a Qualified Intermediary must be involved in the transaction prior to the sale of the property to prepare the legal documents necessary for the exchange.
  • To deter all of the capital gain tax, the property purchased must be of equal or higher value than the property being sold.
  • The tax payer selling the property must be the same taxpayer purchasing the replacement property.
  • Replacement properties must be Identified within the 45 Day Identification period, which starts from the day of the closing on the Relinquished Property.
  • The Exchanger needs to purchase one or more identified properties within 180 days from the sale of the Relinquished property.
  • All the proceeds from the exchange must be received and held in escrow by the Qualified Intermediary, with few exceptions, until the exchange is completed.