1031 Exchange Rules

What Are The Section 1031 Exchange Rules?

The section 1031 exchange rules were first published by the IRS in 1991 as a means to defer capital gains taxation when the proceeds were reinvested in a like kind exchange property. Strict adherence must be made to the 1031 exchange rule regulations, which cover the types of properties that qualify, the time limit for qualification and the amount, if any, that will have to be paid in tax. 

With the booming real estate prices of recent years, more and more property investors are being hit with a large tax bill when they sell their properties.  1031 exchanges are a legal way to defer payment of captial gains tax, by reinvesting the proceeds into a like kind property.  In order for properties to qualify for a 1031 tax exchange, some basic criteria must be met. Requirements include:

1. Both the relinquished and replacement property must be within the U.S.
2. 1031 real estate must be held for at least one year and a day to qualify.
3. The relinquished property must be an investment or business property.
4. The replacement property must be of a like kind.
5. The replacement property must be identified within 45 days of the sale.
6. From the date of closing on the relinquished property you have 180 days to close on the replacement property.

Properties that would not qualify for tax deferment under the code would include:

1. Principal residences.
2. A Second home.
3. A dealer property.
4. Partnership interests in a property, unless done by all partners.

As stated, the rules governing 1031 exchanges must be strictly adhered to and therefore it is always advisable to seek professional advice from a tax expert or qualified intermediary.