1031 Exchange Rules

What are the 1031 Exchange Rules?

There are many provisions within the 1031 tax code and it is important to follow 1031 exchange rules and guidelines. Below we offer you a summary. This is not intended to be a comprehensive resource, nor is it meant to be interpreted as tax or legal advice.

Same Taxpayer

The seller of the relinquished property and the buyer of the replacement property must be the same person, company, or legal entity.

Constructive Receipt and Qualified Intermediary for a 1031 Exchange

The exchanger may not receive or control proceeds from the sale of relinquished property. The proceeds must be deposited with a qualified escrow—also known as a Qualified Intermediary.

A Qualified Intermediary is a person, company, or entity who is not the taxpayer that enters into a written agreement (“exchange agreement”) with the taxpayer to acquire and transfer the relinquished property, and acquire and transfer the replacement property.

Timelines for a 1031 Exchange

The investor (exchanger) must follow the strict 45-/180-day guidelines for an exchange. Once the exchanger sells their property, they have 45 days to identify replacement property(s). Once identified, the exchanger has 180 days from the day they sold their property to acquire the replacement property(s). There are a number of permissible ways to identify replacement property and the best way to identify will vary depending on the investor’s situation.

Like-Kind Property in a 1031 Exchange

The investor must acquire “like-kind” property, meaning it must be other qualifying forms of real estate. For example, the exchanger could sell a duplex and purchase a commercial property, or they could sell a piece of land and buy an apartment building. The property just needs to be “like-kind.”

Exchange Property Held for Investment

The property sold and the newly acquired property must be held for investment or business purposes. You cannot sell your primary residence and buy an investment property, nor can you sell an investment property to purchase a primary home.

Equal or Greater Debt and Equity in a 1031 Exchange

Generally, the cash invested in the replacement property must be equal to or greater than the cash received from the sale of the relinquished property, and the debt placed or assumed on the replacement property must be equal to or greater than the debt relieved upon sale of the relinquished property. The exchanger may add additional proceeds to the new purchase, and take on additional debt. If the exchanger does not want to use all of the sales proceeds, they may elect to do a partial exchange, but must pay the applicable capital gains taxes on the difference. This is referred to as “boot.”