Learn about the requirements for conducting a successful like-kind exchange from a 1031 exchange expert at 1031 National Services.
Taxpayers must meet several requirements to secure tax deferral for a like-kind exchange. Failure to meet even one of the requirements established under Section 1031 or the IRS’s regulations can trigger immediate tax liability, so it is critical that taxpayers work with a highly-experienced 1031 exchange expert throughout the process.
5 Important Requirements for 1031 Exchanges
Section 1031 and the IRS’s regulations establish several requirements for like-kind exchanges. Different requirements apply in different scenarios; and, in many cases, taxpayers will need to navigate complex safe harbors and exceptions to achieve tax deferral. With this in mind, here is an overview of five of the primary requirements for executing a successful 1031 exchange:
1. Like-Kind Property Exchange
One of the hallmarks of a successful 1031 exchange is the exchange of “like-kind” property. Section 1031 provides that taxpayers can avoid recognizing gain if a transaction (or series of transactions) involves property that is “exchanged solely for . . . property of like kind.”
What does it mean for property to be of “like kind”? The statute doesn’t say specifically, although it does list certain transactions that do not qualify as like-kind exchanges. A 1031 exchange expert can help you understand what types of assets qualify as like-kind property for the asset (or assets) you are planning to sell.
2. Investment or Business Use
In addition to requiring an exchange of like-kind property, Section 1031 also requires that each piece of property be held either: (i) “for productive use in a trade or business;” or, (ii) “for investment.” This does not include property that is held “primarily for sale.” Here, too, an experienced 1031 exchange expert can help you determine which assets qualify.
3. Qualified Intermediary
It is often necessary to use a qualified intermediary when conducting a like-kind exchange. One of the qualified intermediary’s primary roles is to manage the timing of the receipt and transfer of funds to ensure that the entire exchange takes place within the time window prescribed by Section 1031.
4. Timing and Deadlines
In most cases, this time window is 180 days. This means that the sale of the exchanged property and the acquisition of the replacement property must take place no more than 180 days apart. However, if this is not feasible, it may still be possible to conduct a like-kind exchange through the use of a qualified intermediary.
5. Equal or Greater Value
Section 1031 allows for deferral of capital gains tax liability triggered by the sale of the exchanged property. As a result, 1031 exchanges must generally involve the acquisition of replacement property that is of equal or greater value to the property being sold. However, tax basis and various other considerations also come into play, and this is another area where the insights of an experienced 1031 exchange expert can be invaluable.
Speak with a 1031 Exchange Expert at 1031 National Services
Would you like to know more about the requirements for conducting a 1031 exchange? To speak with a 1031 exchange expert at 1031 National Services, please call or get in touch with us online today.