1031 Exchange Requirements
1. Property Qualification:
To initiate a 1031 exchange, both the property being sold (relinquished property) and the property being acquired (replacement property) must meet certain qualifications. The properties involved must be held for investment or used in a trade or business, meaning that personal residences or properties primarily held for personal use do not qualify.
2. Identification Period:
Once the relinquished property is sold, the investor has a limited amount of time to identify potential replacement properties. The identification period is 45 calendar days and begins on the day the relinquished property is transferred. During this period, the investor must identify the potential replacement properties in writing and provide this information to a qualified intermediary, who is an independent party involved in facilitating the 1031 exchange.
3. Exchange Period:
Following the identification period, the investor has 180 calendar days to complete the exchange by acquiring the replacement property. The exchange period begins on the day the relinquished property is transferred, and it ends on the earlier of 180 days or the due date (including extensions) for the investor's tax return for the year in which the relinquished property was sold.
4. Use of a Qualified Intermediary:
A qualified intermediary (QI) plays a crucial role in a 1031 exchange. The QI is an independent party responsible for holding the proceeds from the sale of the relinquished property and ensuring that the funds are reinvested into the replacement property. By using a QI, the investor can avoid constructive receipt of the funds and maintain the tax-deferred status of the exchange.
5. Reinvestment Requirement:
To fully defer the capital gains taxes on the sale of the relinquished property, the investor must reinvest all the proceeds into the replacement property. The investor can receive cash from the exchange, known as "boot," may this cash will be subject to capital-gains taxes. It's important to work closely with a tax advisor to understand the implications of any boot received during the exchange.
6. Same Taxpayer Requirement:
A qualified intermediary (QI) plays a crucial role in a 1031 exchange. The QI is an independent party responsible for holding the proceeds from the sale of the relinquished property and ensuring that the funds are reinvested into the replacement property. By using a QI, the investor can avoid constructive receipt of the funds and maintain the tax-deferred status of the exchange.
7. Holding Period:
There are no specific holding period requirements outlined in the tax code for either the relinquished or replacement properties. However, to demonstrate the intent to hold the properties for investment or business purposes, it is generally recommended to hold both properties for at least a year or two.
