A 1031 like kind exchange provides taxpayers the opportunity to defer gain realized from the sale of property. As is true with other relief measures, the tax law has created specific eligibility rules that must be satisfied to qualify for this deferral.
Both the relinquished property you sell and the replacement property you by must meet certain requirements.
• Both properties must be held for use in a trade or business or for investment. Property used primarily for personal use, like a primary residence or a second home or vacation home, does not qualify for like-kind exchange treatment.
• Both properties must be similar enough to qualify as “like-kind.” As used in IRC 1031(a), the words “like-kind” mean similar in nature or character, notwithstanding differences in grade or quality. Most real estate will be like-kind to other real estate. One exception for real estate is that property within the United States is not like-kind to property outside of the United States. Also, improvements that are conveyed without land are not of like kind to land.
• Section 1031 does not apply to exchanges of inventory or stock in trade, stocks, bonds, or notes, other securities or debt, partnership interests, and certificates of trust.
Identification of Replacement Property
Within 45 days of selling the relinquished property you must identify suitable replacement properties. This 45-day rule is very strict and is not extended should the 45th day fall on a Saturday, Sunday, or legal holiday.
The replacement property must be received by the taxpayer within the “exchange period”, which ends within the earlier of 180 days after the date on which the taxpayer transfers the property relinquished, or the due date for the taxpayer tax return for the taxable year in which the transfer of the relinquished property occurs. This 180-day rule is very strict and is not extended if the 180th day should happen to fall on a Saturday, Sunday or legal holiday.
If cash or other proceeds that are not like-kind property are received at the conclusion of the exchange, the transaction will still qualify as a like-kind exchange. If the all the cash or other proceeds are not reinvested in the replacement property, any cash or other proceeds that you retain will be taxable. One way to avoid premature receipt of cash or other proceeds is to use a qualified intermediary or other exchange facilitator to hold those proceeds until the exchange is complete. To be qualified, the 1031 exchange intermediary must not be relative or agent of the exchanging party.
If you have any questions regarding like kind exchanges and the impact on your specific situation, please do not hesitate to contact us.