Comprehensive Guide to 1031 Exchanges: Part 1 – Eligibility and Timing Requirements

1031 exchanges are subject to multiple eligibility and timing requirements. These include the “like-kind property” requirement and the 45-day and 180-day deadlines for identifying and acquiring replacement properties, among others. Taxpayers must strictly comply with all pertinent requirements in order to secure the indefinite tax deferral that is available under Section 1031 of the Internal Revenue Code.

Conducting a 1031 exchange can offer significant tax advantages. However, taxpayers must strictly comply with all applicable requirements to secure available tax advantages. This starts with gaining a clear understanding of the applicable requirements. While taxpayers can—and should—engage 1031 exchange specialists to guide them through the process, it is important for taxpayers to have at least a basic understanding of what Section 1031 of the Internal Revenue Code requires.

In Part 1 of our Comprehensive Guide to 1031 Exchanges, we are focusing on the basic eligibility and timing requirements. In Parts 2 and 3, we will look at the requirements that apply to different types of 1031 exchanges and what taxpayers need to do to prove to the IRS that they are eligible for indefinite tax deferral.

Eligibility Requirements for 1031 Exchanges

There are five basic requirements for conducting a 1031 exchange (or like-kind exchange) under the Internal Revenue Code. Taxpayers must comply with all five of these requirements to establish their eligibility for indefinite tax deferral:

1. Real Estate

Section 1031 of the Internal Revenue Code exclusively applies to transactions involving real estate. While this did not used to be the case, it has been the case since the passage of the Tax Cuts and Jobs Act of 2017.

2. “Held for Productive Use in a Trade or Business or for Investment”

Under Section 1031, like-kind exchange treatment is available exclusively for transactions involving properties “held for productive use in a trade or business or for investment.” This applies to both properties involved in the exchange.

3. Like-Kind Properties

While almost any type of real estate will qualify as being of “like kind” with any other, there are exceptions. For example, properties in the United States are not considered to be of “like kind” with properties in other countries.

4. Reinvestment

To qualify as an exchange, the proceeds from the sale of a taxpayer’s relinquished property must be directly reinvested in the taxpayer’s replacement property. In most cases, this involves conducting a delayed exchange.

5. Exclusions

Certain types of properties are excluded from like-kind exchange treatment under Section 1031. These include primary residences and flip properties, among others.

Timing Requirements for 1031 Exchanges

In all cases, taxpayers seeking indefinite tax deferral must meet two strict timing requirements. Taxpayers can meet these requirements by conducting delayed exchanges, reverse exchanges, and improvement exchanges when necessary:

• 45-Day Rule – Taxpayers have 45 days to “identify” a replacement property once they sell their relinquished property.
• 180–Day Rule – Taxpayers must close on the acquisition of their replacement property within 180 days of selling their relinquished property.

FAQs: Meeting the Basic Requirements for a 1031 Exchange

Is it true that Section 1031 only applies to real estate?

Yes, Section 1031 only applies to real estate. While outdated information remains available online (including this IRS resource), Section 1031 has applied exclusively to like-kind exchanges involving real estate since 2017.

How can I conduct a 1031 exchange when selling to one party and buying from another?

This is a common scenario that can be addressed by conducting a delayed exchange. In a delayed exchange, the taxpayer sells one property (the “relinquished” property) and places the sale proceeds into escrow at the time of sale. The sale proceeds are then used to acquire the “replacement” property from a different party within the 180-day deadline.

Are you required to use a qualified intermediary for a 1031 exchange?

Delayed exchanges, reverse exchanges, and improvement exchanges all require use of a qualified intermediary. Without using a qualified intermediary in these scenarios, taxpayers will be unable to secure indefinite tax deferral under Section 1031 of the Internal Revenue Code.

Contact the 1031 Exchange Specialists at 1031 National Services

At 1031 National Services, our 1031 exchange specialists draw on decades of experience to help taxpayers successfully execute delayed, reverse, and improvement exchanges nationwide. If you would like to learn more about how we can help with your exchange, call us at 888-872-1031 or tell us how we can get in touch with you online today.