The IRS Rules For 1031 Exchanges
In order to qualify for a 1031 exchange you will need to follow eight primary rules in order for your exchange to meet stringent IRS regulations:
1) The property exchanged must be like-kind property: The IRS is very liberal in defining like-kind property. Almost any type of real estate, improved or unimproved, can be exchanged for other real estate.
2) Real Property Use: Both your old and new properties must qualify as investment or business use. If both properties pass this test, you can exchange nearly any type of real estate.
3) 45 Day Identification Period: You have 45 days from the closing of your sale to provide a list of the properties you may want to buy. There are no exceptions to the deadline.
4) 180 Day Exchange Period: From the sale closing date, you have 180 days to close on the purchase of one or more properties from the “45-day list.” Again, there are no exceptions to this deadline.
5) Qualified Intermediary (QI): The IRS mandates that you use a QI to prepare the legal documents for your exchange. The QI must also hold your money, so that you do not have access to it. A segregated account is the only safe way for a QI to hold this money.
6) Proper title holding: You must purchase and take title to your new property exactly as you held title to your old property.
7) Reinvestment Requirement: To defer all of your capital gain tax, you must buy a property equal or higher in value than the one you sold. Also, you must reinvest all of the cash proceeds from your sale.
8) Property Identification: When searching for replacement property, keep in mind that more than one potential property may be identified, as long as you meet one of the following rules:
- Three Property Rule. A maximum of three properties can be identified, regardless of their fair market value.
- 200 Percent Rule. An unlimited amount of properties may be identified as long as their aggregate fair market value does not exceed 200 percent of the value of the relinquished property.
- 95 Percent Rule. An unlimited number of properties may be identified as long as by the end of the exchange period (180 days), the aggregate value of all properties purchased equals at least 95 percent of the value of the relinquished property.