1031 Exchange Frequent Questions, Learning and Resource Center
If you purchased your property before the 45th day and don’t plan on purchasing or identifying additional property, the funds can be returned to you on the first business day after the 45th day.
If you’ve identified additional property, and it’s later than the 45th day, you’ll need to wait until the identification has been satisfied or the end of the 180th day.
To defer capital gain, you’ll need to spend more than what the basis is from the property being sold. In addition, you’ll want to ensure you don’t keep any cash from the sale of the property. By purchasing a new property that is the same or more than the amount of the property you sold, you’ll defer all capital gain.
Tax authority says that in a tax-deferred exchange, both the property relinquished, and the property that replaces it, must be held for a qualified purpose (or use) and be like-kind. Any kind of real estate is like-kind to any other kind of real estate. So the land you want to “sell” or (exchange) is like-kind to a rental real estate property that you might replace it with.
For personal property, the rules are more technical and is determined by asset class and the North American Industrial Classification System. For example, a car is not like-kind to a truck, a boat is not like kind to a helicopter. Also, property in a foreign country or used primarily in a foreign country isn’t like-kind to domestic or primarily domestic-use property.
It’s critical that you consult a competent tax counsel on personal property exchanges.
Exchange property must be held for use in a trade or business or for investment—qualified purpose—and not for personal use or resale—unqualified purpose. So, one’s own residence isn’t exchangeable, neither is a used car for sale. But a duplex you rent out, and a truck you use primarily in your trade or business, probably are exchangeable. In many cases, there are rulings offer guidance on property that falls in gray areas. It’s critical to consult with competent tax counsel.
Once you’ve decided to complete a 1031 exchange and have signed a Purchase Contract, contact Exchange Services right away. We’ll contact your closing agent/escrow officer to obtain a copy of the contract and preliminary title report, so that we can prepare documentation. Exchange documents must be executed and delivered to your closing agent prior to the closing of your sale transaction. While we’re able to prepare our documents quickly, waiting too long puts additional pressure on all parties, especially your closing agent/escrow officer.
Several rules apply to identifying 1031 exchange replacement property. Failure to follow these rules may invalidate your identification and cause your 1031 exchange to be disallowed. Some basic tenants to following include:
You have 45 days from the closing date of your relinquished property sale to identify replacement property(ies). The day after the sale closes is Day 1. A property doesn’t have to be in escrow or under contract to be eligible for identification. After midnight on the 45th day, you’re no longer able to identify replacement property or change your identification in any way.
You can identify more than one replacement property, subject to the rules contained in this paragraph. You don’t have to acquire every property you identify. However, after the 45th day, you can’t use exchange funds to acquire replacement property not identified during the 45-day identification period.
You can identify your replacement property(ies) through 3 options:
- 3 properties—no matter what their value
- Any number of properties with a combined market value that doesn't exceed 200% of all relinquished property
- Any number of properties provided you acquire 95% of the total value of the identified properties
Any property acquired during the 45-day period is considered properly identified, even if it doesn’t appear on your identification form. However, that property is counted for purposes of the 3-property, 200% and 95% rules noted above.
- Be in writing, signed by you (the taxpayer)
- Describe your replacement property(ies) unambiguously
- Be delivered, via fax, US Mail, hand-delivery or email to:
- The person obligated to transfer the replacement property to you (for example, the seller of the replacement property), or
- Any other person “involved” in the exchange (for example, qualified intermediary, escrow agent or title company), other than a “disqualified person,” such as an agent or immediate family member. No matter who you send your identification form to, Exchange Services will require a copy as well. It’s recommended you identify to us—your qualified intermediary.
Your replacement property(ies) should be unambiguous described and, when acquired, a replacement property, must be “substantially the same” property as identified. The Treasury Regulations contain examples of “substantially the same.” In an example we refer to as the “75% rule,” the taxpayer identified 2 acres of unimproved land but acquired only 1.5 acres of that land. The property acquired was held to be substantially the same as the identified property because it did not differ in nature or character and the taxpayer acquired 75% of the identified acreage.
In a contrasting example, the taxpayer identified a barn and 2 acres of land but acquired the barn and only the land underlying the barn. It was held that the property acquired was not substantially the same as the property identified because it differed in its basic nature or character.
If you’re buying less than a 100% interest, the percentage share of what’s being acquired should be noted.
If the replacement property is under construction or to be constructed prior to acquisition, you must include an address or legal description of the property but also a description of the improvements to be completed in as much detail as possible.