Section 1031 is a useful section of the tax code that allows a taxpayer to defer taxable gains on a property by using it as an exchange rather than a simple sale. In order to successfully fulfill a 1031 transaction, you need to follow the specific 1031 exchange requirements. The 1031 exchange rules are very precise and need to be followed exactly in order to get the tax deferred exchange.
1031 Intent and Facts
The first requirement in a 1031 exchange is that the property must be held for productive use in a trade or business or for investment. This is important because the 1031 rules forbid the exchange rules for a personal residence. Next, there obviously needs to be at least two properties in the transaction and the two properties need to be “like-kind.” This means the two properties need to be in a similar class of properties. Real properties tend to be like-kind properties and are generally allowable under the 1031 exchange rules. However, property such as stocks, bonds, securities, interests in a partnership, certificates in trust, and choices in action are excluded in the 1031 exchange rules.
1031 Exchange Property Identification
The next step is the time aspects of the 1031 exchange requirements. In order to qualify under the exchange rules, you must identify an original property that will be exchanged prior to closing. Next, the property that you are going to exchange the original property with must be identified within 45 days of the sale of the original property. The 45 day period is known as the identification period and it cannot be extended. Next is the exchange period. The exchange period means that the second property must be received within 180 days of closing of the original property. This 180 period cannot be extended with exception of a presidentially declared disaster. The entire transaction must be facilitated by a qualified intermediary who is not considered a disqualified person. The second property needs to be of equal or greater value than the original property and all of the proceeds from the sale of the original property needs to go towards purchasing the second property. If not a tax is triggered on the cash received or reduced debt.
Foreign Investment Real Property Tax Act (FIRPTA)
One question that arises is can foreign nationals get involved in a section 1031 exchange? The answer is yes, as long as they follow the FIRPTA requirements. In general, when a foreign national sells US property, a FIRPTA certificate would be created and ten percent of the total amount realized by foreign sellers must be withheld at closing and remitted to the IRS. A FIRPTA 1031 exchange is an exception if a Declaration and Notice to Complete Exchange is made. After the Declaration is made, the narrow requirements includes a simultaneous exchange of property, i.e. property that is exchanged the same day, and that the foreign person not receive any cash or boot.
We Can Help
Atlas 1031 Exchange has been accommodating tax-deferred exchanges of all kinds for more than 17 years. We are fluent in the rules and regulations of IRC Section 1031 and able to help you navigate your exchange.
Contact us today to discuss any questions you may have. Call our office at 1-800-227-1031, email us at info@atlas1031.com, or submit your question through the online form at the top of this page.
