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The exchanged properties must be like in kind. With regard to real property, the definition of “like-kind” is very broad and allows a taxpayer to treat any qualified piece of real estate as like-kind to any other. As a result, a taxpayer may exchange an apartment building for land, and a shopping mall for an apartment building, and so on.

To defer all taxes, the taxpayer must: 1. acquire property equal or greater in value to their Relinquished Property and 2.spend all of the net proceeds from the sale. To do so, the taxpayer will usually also acquire property with equal or greater mortgage debt, as well.

The Replacement Property must be identified in writing, within 45 days of closing of the Relinquished Property. The count begins on the day of the sale and ends 45 days later, regardless of whether that day falls on a weekend or holiday. The Treasury Regulations allow for the identification of multiple properties, provided the Exchanger complies with one of the following rules:

1. The Three Property Rule: Up to three properties may be identified, regardless of their fair market value.

2. The 200% Rule: Four or more properties may be identified, provided the aggregate fair market value of all the identified properties does not exceed 200% of the fair market value of all of the Relinquished Properties.

3. The 95% Rule: Any number of Replacement Properties may be identified, provided the fair market value of the properties actually acquired by the end of the Exchange Period is at least 95% of the Fair Market Value of the potential Replacement Properties that were identified.

The entire exchange process must be completed by the earlier of 180 days from the closing of the sale of the first Relinquished Property, or the date the Exchanger’s tax return is due. If the tax return is due before the expiration of the 180 days, the Exchanger may file for an extension of their tax return due date in order to have the benefit of the full 180 days.

One of the most important requirements for a 1031 Exchange is the safe harbor rule which prohibits the Exchanger from having actual or constructive receipt of the Exchange Funds until the Exchange is completed. In order to avoid actual or constructive receipt, the Exchange Funds need to be held by a Qualified Intermediary (QI) and the Exchanger’s access to the funds must comply with the Treasury Regulations.

Otherwise known as a simultaneous exchange, this is the simplest exchange. It involves the trading of deeds by two property owners. The Two Party Swap works well if the properties are the same value, however, if debt is involved, it becomes more difficult. Due to this lack of flexibility, a two party swap is not a common occurrence.

This most common type of exchange is also sometimes referred to as a Deferred Exchange. In this type of exchange, the Exchanger most often utilizes the services of a Qualified Intermediary like Riverside 1031 to first sell their Relinquished Property, and then subsequently acquire the Replacement Property. The Delayed Exchange is subject to 45 and 180 day timelines (see guidelines for more details).

While a Delayed Exchange requires the taxpayer to close on the Relinquished Property first, a Reverse Exchange allows an Exchanger to first close on the Replacement Property. Similar to the Delayed Exchange, a Reverse Exchange is subject to the 45 day and 180 day timelines, but the count begins on the day of the closing on the first Replacement Property, and the Relinquished Property must be identified within 45 days and purchased within 180 days. This structure is more complex and requires a Qualified Intermediary to take title to one of the properties.

This is also known as a Build to Suit Exchange. It allows taxpayers to use tax deferred dollars to add improvements to the Replacement Property. Similar to a Reverse Exchange, title to the Replacement Property is “parked” with the Qualified Intermediary while the improvements are being made. The taxpayer has a maximum of 180 days to complete the improvements and acquire title to the replacement property from the Qualified Intermediary.

Is there any flexibility to the 45-day identification time frame?

The 45 day identification period generally cannot be extended. The only exception is the occurrence of a federally declared natural disaster that occurs after the first closing, which affects the transaction in one of several prescribed ways.

What happens if the purchase price on the replacement property is less than the price of the relinquished property?

In order to defer all taxes, the purchase price of the Replacement Property must be equal to the sale price of the Relinquished Property, and the Exchanger must spend all of the net proceeds to acquire the Replacement Property. This will generally mean that the Exchanger will also assume equal or greater debt to acquire the Replacement Property. However, IRC §1031 does allow for a partial exchange in which only the excess equity and/or reduction in mortgage debt will be subject to taxation.

Can I take money out of an exchange account?

Once the money is deposited into an exchange account, funds can only be withdrawn in accordance with the Exchange Regulations. The property owner cannot receive any money until the Exchange is complete. If you want to receive a portion of the proceeds in cash, this must be done before the funds are deposited with the Qualified Intermediary.

Can the replacement property eventually be converted to the owner’s primary residence or vacation home?

Yes, but the holding requirements of Section 1031 must be met prior to changing the primary use of the property. Currently, the IRS has no specific regulations on holding periods. However, to be on the safe side, the property owner should hold the replacement property for a proper use for a period of at least one year.

If the owner later on wants to take advantage of the home owner's exemption (up to $250,000 or $500,000 for a couple), there is now a five year holding period requirement.

Can you exchange one property for multiple properties or vice versa?

Yes!

There are no provisions in the §1031 regulations that restrict the amount or number of real estate properties involved in an Exchange. Exchanging several properties into one replacement property or exchanging one property for several other properties, are both perfectly legal ways to take advantage of a 1031 Exchange.

How do you report Section 1031 Like-Kind Exchanges to the IRS?

You must report an exchange to the IRS on Form 8824, Like-Kind Exchanges and file it with your tax return for the year in which the exchange occurred.

Form 8824 asks for:

• Descriptions of the properties exchanged
• Dates that properties were identified and transferred
• Any relationship between the parties to the exchange
• Value of the like-kind and other property received
• Gain or loss on sale of other (non-like-kind) property given up
• Cash received or paid; liabilities relieved or assumed
• Adjusted basis of like-kind property given up; realized gain

If you do not specifically follow the rules for like-kind exchanges, you may be held liable for taxes, penalties, and interest on your transactions.

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