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Requirements and Rules for 1031 Exchanges
The overall rules that govern a 1031 Exchange are quite uncomplicated. Any property type (real or personal) may possibly be exchanged as long as the property to be disposed was held for investment purposes in the past. In most cases, a residential property will not be qualified for a tax-deferred exchange.
Below are the seven requirements for a 1031 exchange:
As per the first rule for a 1031 exchange (rollover), the sold property and the purchased property are of like kind when it comes to their use. In particular, they can qualify only if they were or will be used for investment or business.
Property Identification within 45 Days
According to the Internal Revenue Code, the property to be bought should already be identified within the first 45 calendar days from the closing of the old property’s sale. Even if the 45th day is a holiday, it will hold as the deadline for identifying the new property. Such deadline is very strictly observed, and extensions are, under no circumstances, allowed.
The 180-day Purchase Period
Under Section 1031, the purchase and closing of one or more new properties should be done no later than the 180th day from the old property’s closing. Additionally, the property purchased should be on the 45-day identification list. After the 45th day, no new property may be introduced. Such time frames run simultaneously.
Using a Qualified Intermediary
Sellers will be kept away from the money in between the property sale and the property purchase. The law requires the use of an independent third party known as an exchange partner and/or intermediary, who will be handling the change. This party should be someone who has no family relationship with the taxpayer, or has no business relationship with the same with in the last two years.
Title Has to be Be Mirror Image
Section 1031 provides that the name on the titles of both the old and new properties after the purchase should be one and the same. If a corporation’s shareholders, a partnership’s partners, or an LLC’s members would like to sell their respective corporate interest, this will not be allowed. A 1031 exchange only caters to real estate properties and not business interests.
Reinvest Greater or Equal Amount
This rule actually includes two requirements. First, the new property’s value should have a value that is greater than or at least equal to the value of the property that is sold. Second, all cash profits from the sale have to be reinvested. Part of the proceeds from the property sale can be used to cover closing expenses and commissions.
Reverse Exchanges – Title to Both Properties Cannot Be in One Name Simultaneously
A reverse can be allowed in cases where a seller is still looking for a buyer for the property he intends to sell and is afraid of losing the new property he’s been planning to buy. In simple terms, a taxpayer may or may not have both the old and new properties titled in their name at once and still be approved for a reverse exchange.