Overview of Tax-Deferred Exchanges
A 1031 Exchange, otherwise known as a tax-deferred exchange, allows a taxpayer to sell one or more appreciated assets -- typically real estate but can be non-real-estate -- while deferring the payment of capital gain taxes due to the acquisition of one or more replacement assets or properties.
Qualifications
*Only Applies To Real Estate After 2017 For Federal Purposes. Some States May Not Conform.
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Both the property given and received must be held for business or investment purposes.
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The property cannot be merchandise held for sale to customers (i.e., inventory, raw materials and accounts receivable).
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The properties exchanged must be like-kind (similar in nature, but not necessarily of the same quality).
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Real estate must be exchanged for real estate (improved or unimproved)
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Animals* - exchanges of animals of different sexes don’t qualify.
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Depreciable tangible personal property* must be exchanged for property of “like-kind or class.”
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Vehicles* - Cars, Light Trucks, SUVs & Minivans are like kind (PLR 200912004)
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Mixed Use Property – business portion can qualify (Rev. Proc. 2005-14)
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Special Circumstances
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Vacation Home Rentals may qualify
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Water Rights Stock – Not eligible beginning 2018
Mandatory if qualified
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Section 1031 treatment is not elective. It is mandatory if qualified.
Delayed Exchange
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Transaction must be completed through a qualified intermediary.
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Property to be received in the exchange must be identified within 45 days.
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Taxpayer is allowed to designate a maxof either:
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Three replacement properties regardless of FMV; or
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Any number of properties, if the total FMV isn’t more than 200% of the total FMV of all properties given up.
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Receipt of the new property must be completed before the EARLIER of:
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180 days after the transfer of the property given, OR
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The due date (including extensions) of the return for the year in which the property given was transferred.
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Reverse Exchange
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Property to be exchanged must be identified within 45 days.
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Within 180 days of acquiring replacement properties and after identifying the relinquished property, the title to the replacement property must be transferred to the taxpayer.
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Within 180 days of acquiring replacement properties, the relinquished property must be sold.
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Related IRS Publications and Forms
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Pub 544 - Sales or Other Disposition of Assets,
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Form 8824 – Like-Kind Exchanges
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IRC Sec 1031,
Code Section 1031 allows non-recognition of gain or loss when taxpayers trade properties of like-kind that are used for business or investment.
