A Quick Look at 1031 Rules

Who Qualifies?

If you own an investment or business property, you can qualify for a 1031 exchange, whether you’re an individual, C or S corporation, partnership, or LLC.

Same Taxpayer

The buyer of the replacement property must be the same tax entity as the seller of the relinquished property.

A Qualified Intermediary

A Qualified Intermediary (QI) is a requirement of the IRS 1031 tax law. It’s a company that, through a written agreement with the taxpayer, handles the transfer of money and property titles and ensures proper execution of all required documents.

Third Party

A Qualified Intermediary must hold the proceeds during the exchange. If you control the funds in any way, you may risk disqualifying the entire exchange.

Like-Kind Property

The IRS states that the relinquished property (property being sold) and the replacement property (property being bought) must be like-kind. Generally speaking, any type of business or investment property type may qualify for an exchange, personal-use property, like your primary residence, does not.

45-Calendar-Day Identification Period

You have 45 calendar days from the date that you sell your property to identify potential replacement property(ies).

There are three sub rules that apply to identifying replacement properties:

The Three-Property Rule

  • The most popular identification rule states that you may identify up to three potential replacement properties, regardless of value.
  • The 200% Rule: This rules states that you may identify more than three potential replacement properties as long as their combined value does not exceed 200% of the sale price of the relinquished property.
  • The 95% Rule: A rule that states that you may identify any number of properties with no reference to sale price of the relinquished property, provided you actually acquire and close on 95% of the value identified.

180-Calendar-Day Exchange Period

The IRS states that you must complete the entire exchange, including closing on all replacement properties and receiving title to them, by midnight of the 180th calendar day.

Purchase Price

In order to defer all capital gains tax, the price of the replacement property must be equal to or greater than the relinquished property.



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