1. Relinquished and Replacement properties must be “like-kind”. “Like-kind”simply means that any investment or business use real property located in the United States may qualify for a 1031 Tax Deferred Exchange. The Internal Revenue Code Section 1031 does not apply to primary residences. Properties must not be used for personal use for more than 14 days per year or 10% of the actual number of days the property has been rented in a given year.

  2. Exchanger must use a Qualified Intermediary The sale of the Relinquished Property and the purchase of the Replacement Property must happen through a Qualified Intermediary (QI). QI cannot be the taxpayer or an agent of taxpayer (accountant, attorney, realtor, employee, etc.). The Exchanger must use a qualified Escrow Agent and must not have access to the sale proceeds of the relinquished property.

  3. 1031 Exchange transaction must be properly documented. QI enters into a 1031 exchange Agreement with the Exchanger. Exchanger assigns the rights in the Purchase and Sale Agreement to QI. Exchanger notifies the other party on the transaction (buyer or seller, accordingly) of the intent to perform a 1031 exchange.

  4. Exchanger must meet certain time requirements. Exchanger has 45 days after the closing of the Relinquished property to identify Replacement property . If Exchanger fails to identify Replacement property within 45-day period, the exchange will not work, and the exchange funds will be disbursed to Exchanger, who will not be able to defer the capital gains.
    Exchanger has 180 days running concurrently with the 45-day identification period to acquire at least one of the identified replacement properties to qualify for capital gains tax deferral. If the closing of the Relinquished property occurs after October 16th, the 180-day exchange period will be shortened to the income tax filing deadline of April 15th of the next calendar year unless Exchanger files a timely extension with IRS.

  5. To defer all of the capital gain tax, Exchanger must trade up in equity, fair market value, and acquire property with the same or greater debt. First, Exchanger must re-invest all the net proceeds from the sale of the Relinquished property. Second, he must purchase a property or properties with the sales price equal or grater than the net sale price of the Relinquished property. Third, he must replace the amount of debt he paid off on the Relinquished property. He can either obtain a loan of equal or greater amount on the new property or replace the paid off debt amount with cash. More…

  6. Exchanger must obtain a Replacement property under the same name he held title to the Relinquished property. If Exchanger and a spouse held title to the Relinquished property, they must take title to the Replacement property together. If ABC Trust held title to the Relinquished property, the same ABC Trust must take title to the Replacement property.