1031 Exchange Rules: Six Rules to Know Before Starting A 1031 Exchange
| March 25, 2019
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. Section 1031 of the Internal Revenue Code (IRC) has been around since 1921, but it is still a little known section of the tax code that has tremendous benefits when understood and utilized by investors. The potential benefits of a 1031 Exchange can be tremendous, but, they are carefully-controlled to avoid what the IRS would consider taking unfair advantage of the tax laws. For many, it is intimidating to navigate the rules and intricacies of Section 1031. Don't let that stop you from considering and pursuing a 1031 Exchange. Our team at the 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.
1031 Exchange Rules
- Both properties must be held for Trade, Business or 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 Period. From the closing date of the property you are selling (relinquished property), you have 45 days within which to identify the property or properties that you are considering acquiring (replacement property). This deadline is only extended by a federally declared disaster.
- 180-day Completion Period. From the closing date of your relinquished property, you have 180 calendar days within which to close on your identified replacement property or properties. This deadline is only extended by a federally declared disaster.
- Requirement to 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 Reinvestment Rule. In order to fully defer the capital gains tax from the sale of the relinquished property, you must purchase replacement property or properties with a sales price equal to or greater than the sales price of the relinquished property. The taxpayer must reinvest both the equity and replace the debt relief from the Relinquished Property in order to fully defer the capital gains tax.
The QI should help guide you through the 1031 Exchange rules and provide the documentation to follow the IRS guidelines. The rules and record-keeping required by the IRS, though well-defined, must be strictly adhered to. The 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.