1031 Exchange

What is a 1031 exchange?

A 1031 exchange is a transaction in which eligible property is exchanged for property of likekind and gain or loss is deferred for federal income tax purposes. Normally, when a taxpayer sells property, gain or loss on the sale is recognized in the tax year in which the sale occurs. But in a like-kind exchange, gain or loss on the sale of relinquished property is deferred until the replacement property is sold. A transaction qualifies as a 1031 exchange if it’s an exchange of eligible like-kind properties. Since the Tax Cuts and Jobs Act (TCJA), only real property qualifies for a 1031 exchange.

It is essential for taxpayers engaging in a 1031 exchange to be aware of these concepts and work with qualified tax and legal professionals to ensure compliance with IRS regulations and to make informed decisions to maximize the benefits of the exchange. Additionally, there are specific rules and time frames that must be followed for a successful 1031 exchange.

What type of real property qualifies for a 1031 exchange?

Property is eligible for a 1031 exchange only when it is considered real property under the laws of the state or local jurisdiction where the property is located at the time of the exchange. To qualify as a 1031 exchange, the exchanged properties must be held by the taxpayer for an eligible purpose.

Eligible purposes include:

What does not qualify for a 1031 exchange?

• A sale of property for cash.
• A sale of a property for cash and reinvestment of the proceeds like-kind property. In order to qualify as a 1031 exchange, a qualified intermediary must be used for the transaction.
• Property such as inventory, which is held primarily for sale.
• A primary residence and other property held for personal use is not eligible for a 1031 exchange.
• Stock, bonds, notes, other securities or evidence of indebtedness or interest.
• Interests in a partnership (other than a publicly traded partnership).
• Certificates of trust, certificates of beneficial interests, and choses in action.

Do intangible interests qualify for a 1031 exchange?

• fee ownership
• co-ownership
• a leasehold
• an option to acquire real property
• an easement
• stock in a cooperative housing corporation
• certain shares in a mutual ditch, reservoir, or irrigation company

When is property “like-kind”?

The IRS does not consider the grade or quality of the property when determining whether it’s like-kind.

The property must be located in the United States to qualify.

1031 Exchange Timeline

Investors with Property to Exchange

The Role of a Qualified Intermediary

To complete a successful 1031 exchange, exchangers must identify replacement property(ies) within 45 calendar days after their relinquished property transfer. Exchangers can do this by following one of the following three identification rules:

Like-Kind Real Estate

Some examples of like-kind properties include:

• Multifamily Apartments
• Healthcare
• Self-Storage Facilities
• Retail Centers
• Industrial Waretiouses
• Student Housing
• Senior Living
• Hospitality