1031 Exchange – Rules & Requirements

1031 Exchange Rule

A property transaction can qualify for a deferred tax exchange only if it follows the 1031 exchange rule laid down in the tax code and the treasury regulations.

The foundation of 1031 exchange rule is that the properties involved in the transaction (the property you sell and the property you buy) must both be held for productive purpose in trade or business or as an investment and they must be like kind.

1031 exchange rule also lays down a guideline for the proceeds of sale. The proceeds from the sale must go through the hands of a qualified intermediary and not through your hands or the hands of one of your agents or else all the proceeds will become taxable. The entire cash proceed from the original sale must be reinvested towards acquiring the new property. Any cash proceeds from the sale, if retained, are taxable.

1031 exchange rule requires that the replacement property must be subject to an equal or greater level of debt than the property sold or the buyer will have to pay the tax on the amount of decrease or he will have to put in additional cash to offset the low debt amount on the newly acquired property.

1031 Exchange Rule About Timelines: There are two timelines that anybody going for a 1031 property exchange should abide by.

Identification Period: This is the period during which the party selling the property must identify other replacement properties that he proposes to buy. This period is scheduled as 45 days from the day of selling the relinquished property. This 45 days timeline has to be followed under any and every circumstances and is not extendable even if the 45th day falls on a Saturday, Sunday or legal holiday.

Exchange Period: The period within which the person who has sold the relinquished property must receive the replacement property is referred to as the Exchange Period under 1031 exchange rule.. This period ends at 180 days after the date on which the person transfers the property relinquished or the due date for the person’s tax return for the taxable year in which the transfer of the relinquished property occurred, whichever is earlier. According to 1031 exchange rule about timelines this 180 day timeline has to be adhered to under any circumstances and is not extendable even if the 180th day falls on a Saturday, Sunday or legal holiday.

This document/post/article is not to be considered as legal advice. Content and information contained herein is subject to changes, modifications, and may contain inaccuracies or out-of-date information. As with any legal matter or other matters of importance, consultation with an attorney or professional is the best course of action.

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