6 Rules for 1031 tax deferred exchanges

An AR friend called me today asking about 1031 exchanges.  She knew that we do a lot of them as we are in an area with a lot of rental properties.  Her call reminded me that I had written a couple of posts about them on my outside blog, and thought that I should post them here too. 

When buying or selling certain properties, you can defer the taxes on the gain by doing a 1031 exchange. When you sell one property and buy another, it is possible to defer all taxes on the gain if you follow these six rules to meet the stringent IRS regulations.

The IRS Rules for Exchanges

1. Qualified Intermediary (QI). The IRS mandates that you use a QI to prepare the legal documents for your exchange. Because the QI must be independent, it cannot be your friend, employee, broker, or even your accountant or attorney. The QI also holds your money, so that you do not have access to it.
2. Proper title holding. You must purchase and take title to your new property exactly as you held title to your old property.
3. Reinvestment Requirement. To defer all of your capital gain tax, you must buy a property equal or higher in value than the one you sold. Also, you must reinvest all of the cash proceeds from your sale and the loan amount must be the same or more.
4. Real Property Use. Both your old and new properties must qualify as investment or business use. If both properties pass this test, you can exchange nearly any type of real estate.  Read more about a recent court ruling on 1031 exchange treatment of vacation properties.
5. 45 Day Identification Period. You have 45 days from the closing of your sale to identify the properties you may want to buy. There are no exceptions to the deadline.
6. 180 Day Exchange Period. From the sale closing date, you have 180 days to close on the purchase of one or more properties from the 45-day list. Again, there are no exceptions to this deadline. Miss a deadline and pay the taxes.  The IRS is not very forgiving!

Courtesy of The 1031 Exchange experts.

One other item that not everyone is aware of is that your clients can sell one property and buy two  more with the proceeds!  They are not limited to one property only.   

Another AR posts I wrote on 1031 exchanges tells how a Breckenridge attorney acting as an intermediary disappeared, allegedly with the money!  Take care in giving clients names of companies and make sure that they understand that they are not regulated yet! 

Photo by Thomas Hawk on www.flickr.com