Here’s What you Should Know about 1031 Exchange Rules

Earlier this week, we told you what a 1031 exchange is and how many days you have to complete one. Naturally, you’re probably asking yourself, what are the ground rules?

To recap, the 1031 exchange (a.k.a. the like-kind exchange) gives Commercial Real Estate (CRE) investors the green light to reinvest returns from a sold property into real estate of the same ilk. Under U.S. law, investors who utilize the exchange are able to defer capital gain taxes, all while experiencing portfolio growth and ROI.

It’s important to note that the exchange isn’t tax free, instead it allows investors to postpone paying the tax. According to the Internal Revenue Service (IRS), the exchange can exclusively deal with like-kind property or it can also include cash, liabilities and other not like-kind property – the latter scenario would trigger taxable gain.

Under section 1031, individual owners of investment or business property as well as C corporations, S corporations, partnerships, limited liability companies, trusts and remaining tax paying entities can participate an exchange. To participate, investors must also exchange a property either through a simple swap or a more complex deferred or reverse exchange.

Properties involved in a 1031 exchange must be held for business or investment, not for residential or vacation purposes, for example, and must be similar in nature. According to the IRS, like-kind real estate is “property of the same nature, character or class.”

Also remember that investors have 45 days to identify a replacement for a relinquished property and the exchange must be complete 180 days after the sale of the swapped property.

The IRS requires investors to complete  Form 8824 with your tax return to report a like-kind exchange. The form asks for details about both exchanged properties, the dates in which they were transferred, a disclosure of the relationship between parties involved, property value, recorded gain or loss in sale, cash received or paid, liabilities and adjusted property basis.

To learn more, read “Like-Kind Exchanges Under IRC Code Section 1031and continue following our series. Tomorrow, we’ll go more in-depth about what qualifies for the exchange.

Stay tuned, we’ll be blogging more about 1031 Exchanges in the days to come.

Read all the articles in our 1031 Exchange series here: