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.”

Replacement Property

Rules

Three Property Rule (most common)

The exchanger may identify up to three properties of any value without restrictions.

200% Rule

The Exchanger may identify more than three properties if the total fair market value of what is identified does not exceed 200%(double) of the fair market value of the relinquished property.

The 95% Exemption

If the exchanger identifies more than three properties and the fair market value of the combined replacement properties exceeds 200%, then the Exchanger must acquire 95% of the aggregate value of all properties identified.