Basic 1031 Exchange Rules
Two basic rules must be met to completely defer income taxes on the gain realized from the sale of the relinquished property:
1) The purchase price of the replacement property must be equal to or greater than the net sales price of the relinquished property.
2) All cash or other proceeds received from the sale of the relinquished property must be used to acquire the replacement property.
Property that qualifies for deferred gain treatment under Section §1031 must be “like kind”, as defined under the Code as follows:
1. Property held for productive use in a trade or business, or
2. Property held for investment
Not only does rental or other income property qualify, but unimproved real property held for investment qualifies. Unimproved property can be exchanged for improved or unimproved property as desired. One property may be exchanged for several, or several properties may be consolidated into one. This means that almost any property that is not a personal residence or second home will qualify under Section §1031. Even a home that is used part personal and part income producing may be exchanged. (The income producing portion of the premises may be exchanged.)
The investor has a maximum of 180 days from the close of escrow or transfer of title of the relinquished property to acquire the replacement property. The first 45 days of that period is called the Identification Period. During the 45 days, the investor must identify the replacement property. The identification must be in writing, signed by the investor, and received by the intermediary or other qualified party, faxed, postmarked or otherwise identifiably transmitted(such as Federal Express or other dated courier service) within the 45 day period. Failure to meet the identification requirements will result in the transfer of the relinquished property being taxable.
The investor may identify three properties of any value, one or more of which must be acquired (Three Property Rule). If more than three properties are identified, the aggregate fair market value of all properties may not exceed 200% of the value of the relinquished property (Two Hundred Percent Rule). Exception: Four or more replacement properties with an aggregate value in excess of 200% of the relinquished property value may be identified providing at least 95% of the identified properties are acquired.
It is important to be familiar with the latest Treasury Regulations and Rulings. Bankers Exchange Services provides the expertise and information to assist you in complying with the following rules:
The exchange must be completed within a maximum of 180 days. The time period begins to run on the day/date you transfer title to the relinquished property (usually the close of escrow or closing date). The replacement property must be identified within 45 days from the close of escrow or closing date. A “Qualified Intermediary” or a similar Safe Harbor Rule must be used.
The replacement property must be of equal or greater value than the relinquished property and all of the proceeds must be invested in order to defer all of the gain. Be sure to follow the rules for multiple replacement property identification.
IDENTIFYING NEW PROPERTY -The IRS Code requires that the replacement property be identified within 45 days from the transfer of your relinquished property. Restrictive rules apply for this identification process that must be followed carefully and completed correctly. Listed below are the two rules for multiple replacement property identification.
Three Property Rule- This rule permits three properties of any value to be identified.
The 200% Rule – This rule permits the identification of more than three properties but restricts the combined fair market value of all properties identified to 200% of the fair market value of the property being sold. (relinquished property) Exception: 4 or more replacement properties with an aggregate value in excess of 200% of the relinquished property value may be identified providing at least 95% of the identified properties are acquired.
COMPLETING THE EXCHANGE – The law requires that your exchange be completed by the earlier of 180 days from the transfer of your relinquished property or from the due date of your tax return.
Bankers Exchange Services has offices in Walnut Creek and Oakland and serves the Greater Bay Area and in particular, the East Bay region and will gladly facilitate your real estate 1031 exchange transaction anywhere in the United State or US Territories. Bankers Exchange Services also offers specialized expertise in the following communities: