1031 Exchange Requirements

Like all tax transactions, a 1031 Exchange requires an expert eye to ensure it is taking place legally and efficiently. You will want to talk with a qualified intermediary, accountant, or attorney about your options in pursuing a 1031 Exchange before making any decisions. 

However, by educating yourself now with some of the common requirements for a 1031 Exchange, you’ll save yourself time and money in the long run. You will also be able to narrow down some talking points for that all-important first meeting with your qualified intermediary or expert.

Following are some important steps to consider when determining if a 1031 Exchange will work for your investment:

Requirement 1: “Like Property”

This requirement is critical, and it’s probably the easiest one to learn. For your 1031 Exchange to be valid, both your old property (“relinquished property”) and your new property (“replacement property”) must be of “like property.” The meaning of “like property” varies for different situations, but here are some guidelines:

  • Investors must hold both properties “for investment purposes.” As long as you are not selling or buying personal property, most real estate transactions would fit this. 
  • You can exchange multiple replacement properties for one relinquished property so long as they qualify under the other requirements.
  • A 1031 Exchange must take place within the United States to be valid; in other words, both the relinquished property and replacement property must be located within the United States.

Requirement 2: Greater or Equal Value

If your goal is to eliminate all capital gains taxes on the 1031 Exchange of your property, know that the IRS requires your replacement property to be of equal or greater value to your relinquished property, but there are more specific debt and equity requirements. You can, however, acquire multiple properties to achieve this. More specifically:

  • In total, you must reinvest all the equity from the relinquished property in the replacements property(ies). You may add additional equity or cash if you desire.
  • You must replace all the debt from the relinquished property with the replacement property(ies).
  • Failure to reinvest equity or replace debt may result in what is known as “boot,” which is taxable.

Requirement 3: Valid Property Use

Your 1031 Exchange is only for investment property. In other words, the property must be held for “investment purposes.” Likewise, as mentioned above, you cannot pursue a 1031 Exchange for personal property (not real estate) or your personal residence. 

Requirement 4: Deadlines

You should always talk to your qualified intermediary or expert when determining deadlines for your exchange. Here are some general deadlines:

  • 45-day identification period. As the property owner, you have 45 days after the closing of your property to identify up to three like-kind properties.
  • 180-day purchase period. You must close on your replacement property no later than 180 days after the closing of the relinquished property or the due date of your income tax return for that year, whichever is earlier. 
  • Commencement Date.  Both the 45-day identification period and the 180-day purchase period commence on the closing day (the date of recording of the deed conveying title to the Buyer) of the relinquished property.  
  • Other or additional deadlines. Again, you should contact your legal representative or intermediary for more information about the deadlines surrounding your 1031 Exchange. 

Requirement 5: Identical Taxpayer Name on Paperwork

Your 1031 Exchange paperwork must bear the same name throughout. This means that the name on both your tax return, the fee title ownership of your relinquished property must be the same as the tax return and fee title holder of the replacement property. Although there are some exceptions to this requirement, they are on a case-by-case basis.

Get Qualified Assistance with Your 1031 Exchange

When you have questions about 1031 Exchange or need help from a team of experts such as estate brokers, financial experts, or attorneys, contact Prime West Exchange, Inc. Our managers are leading authorities in real estate and escrow, as well as 1031 Exchange. To get started today, contact our office by phone at (818) 442-2228.