How To Perform A Successful 1031 Exchange?
The relinquished and replacement properties must be ‘like-kind.’
As per the IRS, ‘properties are considered like-kind if they are similar in nature or character, irrespective of grade or quality.’ 1031 exchange rules state that the relinquished property and the replacement property must be held for investment or use in a trade or business.
The investor must identify the replacement property within 45 days.
Upon closing on the sale of your relinquished property, you must identify a new property within 45 days. This 45-day time frame is known as the Identification Period. No extensions will be given if you fail to close your identification before the deadline. You can identify as many as three potential new properties irrespective of their value.
All the identified properties must be acquired within 180 days after closing on the relinquished property.
One or more identified property must be purchased, and the title must be transferred by the 180th day. There are no extensions in this case either.
It is mandatory to involve a Qualified Intermediary in a 1031 Exchange.
A Qualified Intermediary plays the lead role in the completion of a 1031 exchange. Basically, the Qualified Intermediary sells your relinquished property, buys the replacement property on your behalf, and then transfers the title to you. Other jobs of a Qualified Intermediary includes holding the proceeds, preparing the documents, and ensuring that the exchange is carried out within the IRS guidelines.
Both the relinquished property and replacement property must have the same owner.
One of the many 1031 exchange rules requires the taxpayer, who owns the old property, to be the same person whose name is on the title of the replacement property. You must pay attention to the documents that contain the names of the buyer and seller.
The replacement property must be of equal or greater value.
The replacement property must be equal or greater in value than the relinquished property, and the entire proceeds must be reinvested. This way, you can defer 100% tax on your capital gain.
The investor can’t hold the title of both relinquished and replacement properties simultaneously.
An investor cannot have the titles of both properties in their name at the same time. In case you find an investment opportunity that you must act on before selling your relinquished property, you must have someone else holding the legal title. This technique is known as a qualified parking arrangement.