1031 Exchange Requirements

A 1031 exchange is defined by the Internal Revenue Code (IRC) Section 1.1031 as “No gain will be recognized on property held for productive use in business or investment when exchanged for like kind property held for productive use in business or investment.” This means property either real or personal property held for the proper intent can be sold and gain deferred when real or personal property is acquired. The result is the federal and state capital gain and recaptured depreciation taxes are postponed, deferred until the sale of the replacement property. This deferral is referred to by the Internal Revenue Service as a tax free exchange given no tax is paid.
1031 Exchange Requirements

There are many 1031 exchange rules depending on whether real or personal property, US resident or non resident alien, forward or reverse exchange. Common to all 1031 exchanges are the following rules:

qualified intermediary is required by the IRS to correctly structure the exchange
a related party to the taxpayer either by family (siblings, spouse, or lineal descendants) or entity should more than 50% of the value of stock is directly or indirectly owned by an individual must hold the property acquired for two years and if selling the replacement property must also be initiating a 1031 exchange
a disqualified person is prohibited from acting as a qualified intermediary
proper intent implying property is held for qualified use
Foreign nonresident must comply with FIRPTA requirements when selling U.S. real property
net equity and debt retired at sale is equal to or greater in the replacement property, otherwise the difference is taxable
replacement property is identified by the forty fifth calendar day post closing preferably to the qualified intermediary
the exchange period ends on the 180th calendar post closing unless a presidentially disaster notice is posted on the IRS website defining the effected counties
the taxpayer who sells is the taxpayer who buys
real property is exchanged for real property while personal property is exchanged for like kind class and character of personal property
US property is exchangeable for property in the US while international property may be exchanged for property internationally
conveyed rights must be essentially alike including character of title conveyed, rights of parties and duration of interests
taxpayer cannot receive, pledge, borrow or otherwise obtain benefits of the exchange account per § 1.1031(k)-1(g)(6).

Depending upon whether the exchange is a forward, reverse, simultaneous or leasehold improvement will determine the steps the qualified intermediary will use to accommodate the exchange in accordance with IRS regulations.

1031 exchanges can be simple and complex, yet each must comply with IRC 1031 requirements. Every year Regulations, Revenue Procedures, Revenue Rulings, Private Letter Rulings, Technical Advice Memorandums and other types of advice is provided by the IRS to assist interpreting the 1031 statute. Work with a qualified intermediary current on case law interpretations to assure appropriate guidance and accommodation.

Written by Andy Gustafson, CES who has written 1 posts on LandThink.