1031 Exchange Requirements

As with any tax transactions, the 1031 Exchange comes with its own set of rules and requirements to ensure it takes place legally and effectively. Because of the complex nature of these types of exchange, you’ll want to talk with a qualified intermediary, expert, or attorney about what your options are before embarking on any 1031 Exchange.

However, familiarizing yourself with some of the most important and common requirements can go a long way into understanding how your 1031 Exchange will work. The following are some important steps you’ll have to consider when pursuing your 1031 Exchange.

Requirement 1: The Role of “Like Property”

For your 1031 Exchange to be valid, both the relinquished property and the acquired property need to be of “like property.” Although the definition of like property varies, there are some parameters you should be aware of:

  • Both properties must be “held for investment purposes.” Most real estate transactions would be appropriate, so long as they do not include personal property.
  • You can acquire multiple replacement properties for one relinquished property, so long as it qualifies under the rest of the requirements listed here.
  • Both the relinquished property and replacement properties must be within the U.S. to qualify under section 1031.   

Requirement 2: Greater or Equal Value

The IRS requires (if you are to completely avoid paying taxes upon the sale of your property) that your purchased property is of equal or greater value to your relinquished property. You can acquire multiple properties in order to achieve this deficit, so long as their net worth is of greater or equal value.  More Specifically:

  • In aggregate, you must reinvest all the equity from the relinquished property in the replacements property(ies).  You may add additional equity or cash if you desire.
  • In aggregate, you must replace all the debt from the relinquished property in the replacement property(ies).
  • Failure to reinvest equity or replace debt may result in what is known as ‘boot’.  ‘Boot’ is a taxable event.

Requirement 3: Valid Property Use

Your 1031 Exchange is only for investment property, like we mentioned the property must be “held for investment purposes”. You cannot complete a 1031 Exchange on personal property (something other than real estate) or your personal residence, for example, would not count toward a 1031 Exchange.

Requirement 4: Deadlines

There are strict deadlines you must adhere to when considering a 1031 Exchange. These include:

  • 45-day identification period. As the property owner, you have 45 days after the closing of your property to identify up to three like-kind properties.
  • 180-day purchase window. You must close on your replacement property no later than 180 days after the sale of the exchanged property or the due date of your income tax return for that year, whichever is earlier.  
  • Other specific deadlines. Certain types of exchanges have additional deadlines that you need to be aware of; contact your legal representative or intermediary for more information.

Requirement 5: Same Taxpayer on Paperwork

In order for your 1031 Exchange to be valid, the name on both the tax return and title of the old property must be the same as the tax return and title holder of the new property. There can be exceptions to this rule, but these are on a case by case basis.

Get Expert Assistance with Your 1031 Exchange

If you’re concerned about your 1031 Exchange or need the help of a qualified team of real estate brokers, attorneys, and other financial experts, the team at 1031Xchange, LLC can help. We know all the requirements of a 1031 Exchange and can ensure your transaction is smooth and efficient. Contact us by phone today at (866) 724-1031.