A 1031 exchange is a tax-deferred exchange and is THE way to sell-exchange one investment or business property for another without having to pay capital gain taxes to the state or government or just partial. The process of a 1031 exchange is much like buying and selling properties that you may own but what makes this process different is that this type of transaction is an exchange of “like-kind” properties.

The basis of a 1031 exchange rule is that the properties being exchanged must be “like-kind” and the properties must be used for intent in business or trade, as an investment & not owner-occupied chiefly.

Rules to Follow: There are two primary rules to consider when doing a 1031 exchange:

  • The total purchase price of the "like-kind" property that you are replacing your existing property with must be equal to, or greater than the total net sales price of your existing property you are exchanging. If the replacement property that you are exchanging is equal to or greater than the debt of the property sold, you will have to pay the taxes on the value over basis, additional or accelerated depreciation, which is what you are trying to avoid by doing a 1031 exchange.

All the profit received from the sale of the property must be used to purchase the replacement, "like-kind" property or that profit will be taxed most likely in a capital gains situation.

NOTE—You still can get credit for a majority of tax savings even if you violate these rules. You will just have to pay some taxes on the cash, boot, or relief of the exchange! So not all is lost if not followed perfectly. Yet one needs to do this properly without constructive receipt of the cash, notes, property and held by a QI-a Qualified Intermediary-accepted by the Internal Revenue Service.

In Due Time
Timing also must be considered when performing an IRS 1031 exchange. If you are selling your property, you must pinpoint no more than three properties that you want to make the exchange. You have 45 days from the day of selling your property to make this decision and these 45 days are set in stone and cannot be extended. And if it goes onto another calendar year it still follows.

Another timing rule that is important is that if you are the one who has sold the property, you must receive the “like-kind” property within 180 days, and again, this 180-day deadline cannot be extended for any reason. This time limit of 180 days starts the day you deed over the property for the exchange.

Keep in mind that the 45-day limit is also included in the 180-day time limit.

Although you may have a good grasp and understanding of the rules of a 1031 exchange, yet RE experts strongly suggest that you use the services of an exchanger like a member of the National Council of Exchangors, The New England Exchangers, or a qualified commercial Realtor as they know the specific rules and down and dirty details of the exchange in order to keep in accordance with the IRS.