1031 Exchanges
A 1031 exchange, also known as a like-kind exchange, allows taxpayers to defer capital gains taxes on the sale of investment property by reinvesting the proceeds into another like-kind property. Key rules include: the new property must be of equal or greater value to the old, the new property must be identified within 45 days of the sale, and the exchange must be completed within 180 days. Additionally, the property must be held for investment or business purposes, and the title of the property must be in the same taxpayer’s name
Here's a more detailed look at the rules:
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Like-Kind Property:
The property being sold (relinquished property) and the property being purchased (replacement property) must be like-kind. For real estate, like-kind generally means any improved or unimproved real estate held for income, investment, or business use. It doesn't necessarily mean the properties have to be in the same asset class.
2. Same Taxpayer Rule:
The same taxpayer who owns the relinquished property must also acquire the replacement property.
3. Holding Time:
There's no specific minimum holding period, but the IRS generally looks for properties held for a substantial period, and it's generally safe to hold the new property for at least six months, ideally a year.
4. Equal or Greater Value:
The replacement property must be of equal or greater value than the relinquished property to fully defer capital gains taxes. Any boot (non-like-kind property or cash) received in addition to the replacement property will be taxable to the extent of the gain realized on the exchange.
5. Identification Period:
The replacement property must be identified within 45 days of the sale of the relinquished property.
6. Purchase Period:
The exchange must be completed within 180 days of the sale of the relinquished property.
7. Qualified Intermediary (QI):
A QI is a third party who holds the sale proceeds of the relinquished property and facilitates the exchange by purchasing the replacement property on behalf of the taxpayer.
8. Property Use:
The relinquished property and the replacement property must be held for investment or business use, not for personal use like a primary residence. Property held primarily for resale also does not qualify.
