1031 Exchange Guidelines

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  • 1031 Exchange Guidelines

    1031 Exchanges at a Glance

    • Seller should have the contract specify that the sale may be structured as a 1031 Exchange by including an Exchange Addendum.
    • Seller cannot receive or control the net proceeds – the proceeds must be deposited in a qualified escrow. See section below on The Use of a Qualified Intermediary.
    • Replacement property must be “like-kind” to the relinquished property. For real property, “like-kind” is any property held for investment or use in a trade or business.
    • The replacement property must be identified within 45 days from the sale of the original (relinquished) property.
    • The replacement property must be acquired within 180 days from the sale of the relinquished property, or the due date of your federal tax return, whichever is earlier.

    In order to defer 100% of the taxes on the sale of relinquished property, the exchangor should follow these general rules:

    1. Purchase replacement property of equal or greater value than the relinquished property
    2. Reinvest all the equity into the replacement property
    3. Obtain the same or greater debt on the replacement property as on the relinquished property

    Note: Debt may be replaced with additional cash; however, equity from the exchange cannot be replaced by increasing debt.

    Identification Rules

    You may follow one of three identification rules when executing a 1031 Exchange.

    • Three Property Rule: You may identifiy up to three potential replacement properties without regard to their value.
    • 200% Rule: You may identify any number of potential replacement properties provided the fair market value of all properties identified does not exceed 200% of the fair market value of the relinquished property.
    • 95% Rule: If you identify more than three properties and the aggregate value of the properties exceeds 200% of the relinquished property, then you must acquire 95% of the fair market value of all properties identified.

    The identification notice must contain an unambiguous description of the replacement property and must be signed by the taxpayer and submitted to the qualified intermediary no later than the 45th day of the identification period.

    The use of a Qualified Intermediary:
    A Qualified Intermediary (QI) is essential to completing a successful 1031 exchange. The QI acts as a fiduciary that holds the exchange proceeds and provides services to help keep the taxpayer in compliance with the IRS rules and laws. A QI must be an independent party to the exchange transaction, meaning the QI cannot also serve as the exchangor’s tax advisor, attorney, real estate or securities broker. Violation of this rule could result in the exchange being disallowed by the IRS. Qualified Intermediaries are not regulated or licensed, so be sure to choose one carefully. If you require assistance in selecting a QI, 1031 Investment Services can provide you with one or more from which to choose. For a list of Qualified Intermediaries with which our company has worked please click here.

    Partial 1031 Exchanges are allowed:
    Taxable funds can be taken either at the closing of the relinquished property or at the completion of the exchange process.  Cash received or debt not replaced will be taxable.  Partial exchanges may be prudent for investors lacking liquidity.

    Like-Kind Requirements:
    Replacement property acquired in a 1031 exchange must be “like-kind” to the property being relinquished.  “Like-Kind” real property (real estate) is any real estate other than your personal residence or second home.  All real property is “like-kind”, regardless of whether it is improved or unimproved and regardless of the type of improvement or interest.  Therefore, raw land may be exchanged for an office, a retail property may be exchanged for a multi-family, and individually owned property may be exchanged for a TIC, etc.

    The Purpose Requirement:
    Both the relinquished property and the replacement property must be held for productive use in a trade or business or for investment. Thus, you can not exchange into or out of a personal residence or property held for resale as a dealer.

    Holding Periods:
    A one year holding period is commonly used as a rule of thumb, but has no basis in statutory or case law.  The holding period applies to both the relinquished and replacement property and is a fact and circumstance to be considered in determining whether the purpose requirement has been met.  Specific guidance on the holding period for vacation homes was issued in Revenue Procedure 2008-16.

    Title Requirements:
    The exchangor must take title to the replacement property in the same manner they held title to the relinquished property.  Any taxpayer (individual or entity) can execute a 1031 exchange; this includes C corps, S corps, Partnerships, Trusts, and LLCs.


    Neither 1031 Investment Services, LLC nor DFPG Investments, Inc. provide tax or legal advice.  Investors should consult with a qualified tax or legal professional regarding 1031 exchange and/or tax related issues.


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