1031 EXCHANGE RULES AND TIMELINE

At AFC, we translate the rules the IRS lays out into easy guidelines anyone can understand.

• If the relinquished property is in the United States, then the purchased property must also be in the United States. Foreign property exchanges are permitted as long as both the relinquished and purchased properties are outside of the United States.
• The properties must be of like-kind nature; in other words, in regards to real property, all real property is like-kind. The IRS does not specify the quality or grade the two properties must have.

In order to obtain the full benefit of a tax deferral, the replacement property must be of equal or greater value to the relinquished property. The relinquished and replacement properties cannot be used by the investor as a primary residence and dealer property held for resale cannot be exchanged.  The property sold and the property purchased must be for productive use in, or investment or income purposes.

All proceeds from the sale of the relinquished property must go directly to the Qualified Intermediary and eventually, to the purchase of the replacement property

The investor selling the relinquished property must be the same investor purchasing the replacement property. 

Closing Dates to Be Aware of

IRC §1031 demands that a replacement property (property being purchased with the sale proceeds) must be identified within 45 days of the closing date of the relinquished property being sold. Unless an extension is filed with the IRS (Note: IRS grants extensions only during natural disasters or for few other emergencies but will not grant extensions on a case by case basis), the replacement property must be purchased before the 180^th day of the sale of the exchanged property or by the exchanger’s tax return due date of that year; which ever comes first.

Rules of Identification 

One of the three following rules must be adhered to when identifying your replacement property:

• Three property rule  The exchanger may identify up to three potential replacement properties without regard to fair market value
• 200% Rule  Given that their combined fair market value does not exceed 200% of the value of the relinquished property, the exchanger is permitted to identify more than three properties
• 95% Rule  The exchanger may identify any number of properties, regardless of combined fair market value, on condition that the exchanger purchases 95% of the combined values of those properties. 

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