Introduction To The Six Rules of 1031 Exchanges:
Section 1031 Exchanges are invaluable wealth-building tools recognized by the IRS to defer capital gains taxes you might incur upon the sale of property. They serve a valuable purpose in wealth-building by managing tax considerations as you grow your financial estate. But, 1031 Exchanges are carefully-controlled to avoid what the IRS would consider taking unfair advantage of the tax laws. Exchange Resource Group can guide you through those nuances to maximize your Section 1031 opportunities.
Below are the six specific rules that must be carefully followed in order to take full advantage of the tax benefits of 1031 Exchanges.
- Both properties must be “held for Investment purposes”. This means any real property that is not your primary residence, that is held for investment purposes, and that can be exchanged for another “like-kind” (held for investment purposes) property.
- 45-day identification of property to be acquired. From the date of the closing of the property you are selling (your “Relinquished Property”), you have 45 days within which to identify the property or properties (you may identify up to three properties) that you are acquiring (your “Replacement Property”). The deadline cannot be extended.
- 180-day Completion. From the date of the closing of your Relinquished Property, you have 180 calendar days within which to close on your identified Replacement Property. Again, the IRS does not give extensions.
- The IRS mandates that every Exchanger use a Qualified Intermediary. The IRS requires that a Qualified Intermediary (“QI”), act as a third-party to facilitate the 1031 Exchange. The QI documents the 1031 Exchange and holds the 1031 Exchange proceeds between the sale and purchase of the Exchange properties.
- Title to both properties must be held by the same taxpayer. The IRS requires that the taxpayer who is the owner-of-record at the time of the sale of the Relinquished Property must be the identical taxpayer who takes title to the Replacement Property.
- “Equal or Up”. In order to fully defer the capital gains tax from the sale of the Relinquished Property, you must purchase Replacement Property(ies) with a sales price equal to or greater than the sales price of the Relinquished Property. The taxpayer must replace both the equity and the debt from the Relinquished Property in order to fully defer the capital gains tax.
The rules and record-keeping required by the IRS, though well-defined, must be strictly adhered to. Exchange Resource Group is your best choice to assist you as your QI. Exchange Resource Group has more in-depth material to provide you on this subject, and we are eager to offer you our expertise in making the Exchange experience a positive one. We encourage you, however, to seek tax advice on the matter from your tax professional, whom we will be pleased to work with to make sure all the questions regarding your transactions are answered.