About 1031 Exchanges

A §1031 tax deferred real estate exchange should be considered by anyone who owns investment real estate. As an investor, substantial appreciation of investment property is a desirable result; however, this great investment may be lessened by having to pay sizable federal capital gains taxes as well as state capital gains taxes depending on the state. By engaging in a Section 1031 tax deferred real estate exchange you are able to save thousands of dollars by deferring the capital gains taxes while preserving net worth by reinvesting the sale proceeds into new investment property.

In order to complete a Section 1031 tax deferred real estate exchange you must comply with the rules of the Internal Revenue Code and all other applicable tax laws.

The general requirements are clear:

Exchange Agreement

Prior to the closing on the sale of your property you must retain the services of a Qualified Intermediary, such as Heartland Exchange, LLC. An exchange agreement between yourself and the Intermediary must be in place prior to the closing date.

Identification Period

◆ The replacement property must be properly identified within 45 days of the closing date. Identification Procedures It is a common misconception that you may identify as many properties as you wish. On the contrary, you must identify property in accordance with one of the follow rules or it will be as if no property was identified at all.

  • Three Property Rule:
    • Three properties, regardless of value; or
  • 200 Percent Rule:
    • Any number of properties as long as the total aggregate value of all properties identified does not exceed 200% of the value of the relinquished property; or
  • 95 Percent Rule:
    • Any number of properties, regardless of their combined fair market value, as long as you acquire 95% or more of the total value of such properties.

Exchange Period

You must acquire the replacement property by the earlier of the following:

  • 180 days after the transfer of the property you sold; or
  • the due date of filing your federal tax return for the year in which you transferred the relinquished property, including extensions.

Trade Value

In order to fully defer all capital gains taxes on the sale of your property you must purchase replacement property of equal or greater value and with equal or greater equity than your relinquished property. Simply stated, trade up in value and in equity.

Like-Kind Property

There is an erroneous belief that the like-kind requirement necessitates that the property you sell and the property you purchase be exactly the same. Quite the opposite is true, like-kind does not mean exactly the same. For example a residential rental home may be exchanged for farmland, an office building, or retail center. Most real property is considered like-kind to other real property. The like-kind requirement places stricter limitations on the exchange of personal property.