Internal Revenue Code Section 1031 has many 1031 exchange rules that start with the code itself: “No gain or loss is recognized when property held for productive use in a trade, business or investment is exchanged for property held for productive use in a trade, business or investment.” A 1031 rule is to hold the property for the proper intent – or not for predominant personal use. Without proper intent, the 1031 exchange is not eligible for consideration.
Same Taxpayer
The taxpayer who sells is the taxpayer who must purchase. There is an exception, such as a single member limited liability company (SMLLC). The SMLLC can sell, and the single member can purchase the replacement property.
Timelines
In each 1031 forward exchange, the 1031 rule requires that the replacement property is identified no later than the 45th calendar day following the close on the old property. An additional 135 calendar days is available to acquire the replacement property for a total of 180 calendar days. The exception is if the exchange starts on or after October 16th, then to receive the full 180 calendar days, the taxpayer must request a filing extension on their federal tax return; otherwise, the exchange ends on April 15th or the then current federal filing deadline.
Equal to or Greater
To defer the recognized gain, the replacement property must be equal to or greater than the relinquished or old property selling price. The debt retired and net equity must be equal to or greater reflecting the selling expenses such as sales commissions, title and inspection and Qualified Intermediary fees. If not, then a partial exchange will trigger tax on the difference.
Related Party
Another 1031 exchange rule is applied when selling or acquiring from a related party. A related party is anyone either ascending or descending blood line, implying siblings, spouse, ancestors or family trust, individual and corporation, where more than 50 percent in value of the stock is owned directly or indirectly by or for the taxpayer. Selling the relinquished property to a related party requires the related party to hold the acquired property for at least two years. Acquiring the replacement property from a related party requires the related party to also initiate a 1031 exchange and not cash out.
Real vs. Personal Property
Real property can be exchanged for any real property given the location is within the United States or if selling internationally owned real property for property held overseas. Personal property must be exchanged for like-kind or like-class personal property. Real property cannot be exchanged for personal property.
Qualified Intermediary
A 1031 exchange rule requires the use of a qualified intermediary to accommodate the exchange with one exception, if the taxpayer exchanges property for the seller and vice versa. This is also known as a pure or two party exchange. A qualified intermediary is a company that is independent of the taxpayer and cannot be a family member or entity where more than 90 percent is owned by the exchanging entity.
There are many more 1031 rules that the qualified intermediary will consider when listening to your 1031 exchange. Contact our office to allow us to listen and accommodate your 1031 exchange. Want to get a complimentary copy of the benefits of a 1031 exchange for owners of fast food and other franchises? Click on the button below.
