The tax return and name appearing on the title of the property that sells must be the tax return and titleholder that buys. A single member limited liability company (smllc) is considered a pass through to the member, consequently, the smllc may sell and the member may purchase in their individual name.
Post closing of the first property, the Exchangor has 45 calendar days to identify to either the accommodator or the closing entity the addresses of the potential replacement properties. In a reverse exchange where either the replacement or relinquished property is parked, the Exchangor has 45 days to submit a final list of properties for sale or purchase.
- Three property rule – can identify any three properties regardless of value.
- Two hundred percent rule – can identify four or more properties as long as the value does not exceed 200 percent percent of the property sold.
- 95-percent exception rule – if the value exceeds 200 percent, then 95 percent of what is identified must be purchased.
Within 180 calendar days following the closing of the first property or extension of the Exchangor’s tax return, the property must be purchased.
The net market value and equity of the property sold must be equal to or greater in the replacement property to defer 100 percent of the tax. Otherwise, the Exchangor needs to pay tax on the difference. Debt and equity in the replacement property must be equal to or greater than the debt and equity in the relinquished property. Additional equity in the replacement property offsets debt. Additional debt does not offset equity.
Though there is no hold time in the 1031 code, the Internal Revenue Service looks to determine whether the property was acquired immediately before the exchange. Was it purchased to fix and flip or held for productive use or investment? Time is one of many factors that supports the intent to hold for investment. The shorter the time, the more substantial the facts should be to support the intent. Additional supportive facts are whether the property is itemized on Schedule E or Schedule A. Investment properties are listed on Schedule E. Was the property rented? Does the level of personal use exceed 14 overnights per year? If so, the character may resemble a second home.
1031 Exchange Quick Facts
Simultaneous or Concurrent 1031 Exchange Rules
The relinquished property and the like-kind replacement property close (settle) at the same time in a Simultaneous 1031 Exchange or Concurrent 1031 Exchange.
Forward or Delayed 1031 Exchange Rules
You close on your relinquished property first and subsequently purchase (close on) your like-kind replacement property within the prescribed deadlines in a Forward or Delayed 1031 Exchange (also referred to as a “Starker” Exchange).
Reverse 1031 Exchange Rules
The like-kind replacement property is acquired and “parked” by the 1031 Exchange Qualified Intermediary (“QI”) first and the relinquished property is subsequently sold later within the prescribed 1031 Exchange deadlines in a Reverse 1031 Exchange.
Build-to-Suit (Improvement or Construction) 1031 Exchange Rules
Your 1031 Exchange proceeds from the sale of your relinquished property are used to acquire like-kind replacement property and some of the left over 1031 Exchange funds are used to improve the replacement property in a Build-To-Suit 1031 Exchange.
Personal Property 1031 Exchange Rules
Personal property (i.e. non-real estate) can also be exchanged for other personal property of like-kind or like-class in a Personal Property 1031 Exchange.
Related Party Transactions
Related party 1031 Exchange transactions occur when you sell your relinquished property to a related party or you buy your like kind replacement property from a related party. Related party 1031 Exchanges are permitted provided you follow specific rules and requirements issued by the Internal Revenue Service.
If the old property is sold to a related party, the property must be held for two years before selling or the tax deferred by the 1031 exchange is due. You can purchase the replacement property from a related party, only if they are also initiating a 1031 exchange.
Related party issues can also be avoided altogether if the related party relationship is eliminated prior to structuring and completing the 1031 Exchange transaction.
Related parties include, but are not limited to, immediate family members, such as brothers, sisters, spouses, ancestors and lineal descendants. Related parties do not include stepparents, uncles, aunts, in-laws, cousins, nephews, nieces and ex-spouses.
Corporations, limited liability companies or partnerships in which more than 50% of the stock, membership interests or partnership interests, or more than 50% of the capital interests or profit interests, is owned by the taxpayer is considered to be a related party.
Lineal descendants are the direct line of relationship flowing downwards from an individual starting with his children, grand children and their children and so on. More info about linear descendants here.
Do You or Your Clients Own any of the following Real and Personal Property as an Investment or for use in Their Business?
There are many real and personal properties eligible for 1031 exchange. Here are some you might want to consider:
- 1031 Exchange Businesses
- 1031 Exchange Farmland
- 1031 Exchange Shopping Centers
- 1031 Exchange Golf Courses
- 1031 Exchange Trailer Parks
- 1031 Exchange Self Storage Facilities
- Oil, gas and mineral interests
- Water and ditch rights
- 1031 Exchange Parking Lots
- 1031 Exchange Condominiums
- Improvements/Build to Suit
- Build on land already owned
- 1031 Exchange Nursing Homes
- 1031 Exchange Senior Housing
- Gold, silver and numismatic coins
- 1031 Exchange Convenience Stores
- 1031 Exchange Land
- 1031 Exchange Buildings, Warehouses
- 1031 Exchange Gas stations
- 1031 Exchange Apartments
- 1031 Exchange Hotels & Motels
- Leasing portfolios with cars, trucks and equipment
- 1031 Exchange Hospital Equipment
- 1031 Exchange Artwork
- 1031 Exchange Rental Properties
- 1031 Exchange Collectibles – rugs, antiques, cars, coins, stamps, metals, gems
- Conservation easements
- 1031 Exchange Timberland
- Communication towers
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