A Section 1031 exchange allows an investor to defer capital gains taxes when selling an investment property, provided the proceeds are reinvested into a like-kind property. Understanding the rules is essential to a successful exchange.
The Basic Requirements
The property being sold (relinquished property) and the property being acquired (replacement property) must both be held for investment or used in a trade or business. Personal residences do not qualify.
The 45-Day Identification Rule
From the date of closing on the relinquished property, the exchanger has exactly 45 calendar days to identify potential replacement properties. This deadline is absolute and cannot be extended for any reason, including weekends or holidays.
The 180-Day Exchange Period
The exchanger must close on the replacement property within 180 calendar days of selling the relinquished property, or by the due date of the tax return for that year (including extensions), whichever comes first.
Equal or Greater Value
To fully defer all capital gains taxes, the replacement property must be of equal or greater value than the relinquished property. Any cash received (known as “boot”) will be taxable.
Qualified Intermediary Requirement
A Qualified Intermediary (QI) must facilitate the exchange. The exchanger cannot touch the funds between the sale of the relinquished property and the purchase of the replacement property. The QI holds the proceeds in a segregated trust account.
Same Taxpayer Rule
The same taxpayer who sells the relinquished property must acquire the replacement property. The name on the title of the property sold must be the same as the name on the title of the property purchased.