1031 Exchange: Basic Requirements

Safe Harbors

The §1031 Treasury Regulations provide several safe harbors for taxpayers to utilize with the qualified intermediary safe harbor being the most common.

45/180 Timelines

IRC §1031 requires taxpayers to identify potential replacement property within 45 days from the date of closing the relinquished property and to complete the exchange in 180 days.

Like-Kind Requirement

Both the relinquished and replacement property(ies) must qualify as property held for productive use in a business or trade (generally income property or property where one’s business is located) or for investment (raw land).

Equal or Greater Value and Equity

To properly defer all capital gains tax, an exchanger must purchase replacement property or properties that equal the net sales price of the relinquished property. Additionally, all the equity derived from the exchange of the relinquished property must be reinvested. Any cash received by the taxpayer will be considered taxable “boot.”

Internal Revenue Code
26 U.S.C. §1031

No gain or loss shall be recognized on the exchange of productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment.