Requirements and Rules for 1031 Exchanges
The overall rules that govern a 1031 Exchange are quite uncomplicated. Any property type (real or personal) may possibly be exchanged as long as the property to be disposed was held for investment purposes in the past. In most situations, a personal residence will is not qualified for a tax-deferred exchange.
Below are the seven requirements for a 1031 exchange:
Like-Kind Property
First of all, in a 1031 exchange (rollover), the old property and the new property should be of like kind when it comes to usage. In particular, they are qualified only if they were or are to be used for a business or an investment.
Property Identification within 45 Days
The Internal Revenue Code indicates that within 45 calendar days after the old property’s sale is closed, the new property to be purchased must be identified. Even if the 45th day is a holiday, it will hold as the deadline for identifying the new property. Such deadline is followed very strictly, and under no circumstances is it extended.
The 180-day Purchase Period
Section 1031 requires the buying and closing of one or more new properties must happen on or before the 180th day of the closing of the sold property. Additionally, the property purchased should be on the 45-day identification list. On the 46th day, no new property may be introduced. These are concurrent time frames.
Using a Qualified Intermediary
Sellers will not be allowed to touch the money in between the old property’s sale and the new property’s purchase. The law requires the use of an independent third party known as an exchange partner and/or intermediary, who will be handling the change. This party cannot be a relative of the taxpayer or a business associate of the same within the last two years.
Title Has to be Be Mirror Image
Section 1031 provides that the name on the titles of both the old and new properties after the purchase should be one and the same. If a corporation’s shareholders, a partnership’s partners, or an LLC’s members would like to sell their respective corporate interest, this will not be allowed. Only real estate and not business interests qualify for 1031.
Reinvest Greater or Equal Amount
Two requirements actually fall under this rule. First, the new property’s value should have a value that is greater than or at least equal to the value of the property that is sold. Second, all of the cash profits should be reinvested. Closing expenses and commissions may be taken from the property sale.
Reverse Exchanges – Title to Both Properties Cannot Be in One Name Simultaneously
A reverse can be useful when a seller still has no buyer for the property that he wants to sell and is worried about losing the new property he would like to buy. In other words, a taxpayer may not have both the sold and purchased properties titled to their name at the same time and still be approved for a reverse exchange.
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