1031 Exchange Rules - the Basics

(c) Copyright 2006 by Mark Hayes

4. The 1031 exchanger must not actually receive the proceeds of the sale of the relinquished property.

Similar to the case of a tax free rollover IRA, for the 1031 exchange rules to be satisfied, you cannot come into possession of the proceeds of the sale of the relinquished property. This 1031 exchange rule is responsible for many 1031 real estate exchanges to fail, intentionally or not. If you are planning on a 1031 exchange, make sure you planned for where the funds are to be held on your behalf before you go to closing. Once you are at closing and there is no other arrangement for the proceeds to be held for you, it will be impossibly hard to get out of paying capital gains tax.

5. A qualified intermediary or accommodator must be used.

The job of a qualified intermediary or accommodator is to facilitate the 1031 exchange, prepare all the paperwork, and ensure the compliance of 1031 exchange rules. Most 1031 exchanges are done through qualified intermediaries or accommodators. The accommodator will hold the proceeds of the sale of the relinquished properties until it is used to acquire replacement properties. Although it is not an IRS requirement that an accommodator is used, it makes the 1031 exchange much easier and smoother. Nowadays, the cost of hiring an accommodator is far less than the hassle you will have if you don’t use one.

6. The 1031 exchange must comply with identification and closing time frame requirements.

Previously, the 1031 exchange had to be done simultaneously. That means you had to close on the sale of the relinquished property at the same time as on the purchase of a replacement property. That set-up created big problems.

The turning point came with a court case, Starker V. United States. This famous 1979 case paved the way for delayed 1031 exchanges. Five years after Starker’s case, Congress enacted revisions to the Internal Revenue Code (IRC) Section 1031 of the time frame required for the 1031 exchange rules. Nowadays, for a 1031 exchange to be valid, two things must be satisfied. The first is that the replacement property must be identified within 45 (forty five) days of closing and transfer of the relinquished property. The second is that the exchanger must acquire the title of the new property within 180 days of closing.

That’s it. Now that you know the basics of the 1031 exchange rules, you should try to take advantage of the IRC section 1031 at the very next sale of your property. It is not as hard as most people think to qualify for a 1031 exchange, but there are, as you can see, many rules to follow. There is also a buy now and exchange later strategy of 1031 exchange rules, called the Reverse 1031 Exchange rules, that may help you save even more money.

------------------------------------------------------------

Mark Hays is a financial manager with 25 years of experience in financial management and estate planning. He specializes in tax planning and has helped many benefit from tax deferral and tax reduction strategies. If you would like more information on the 1031 exchange, browse this website.