First of course is the disclaimer: always seek professional help through your tax attorney and/or CPA before and during an exchange. I am a commercial real estate professional and not an attorney or CPA. That said, with the number of 1031 exchanges I’ve done, I’m pretty familiar with the rules, strategies, and tactics, so let’s get started.
IRC Section 1031 has been around since 1921 and is one of the last significant tax advantages for the real estate investor. It could become even more important if the capital gains rate rises after the election and that rise could be to the earned income rate.
The IRS allows up a maximum of 180 calendar days for completion of 1031 exchanges, and not a day more, between the sale of the ‘relinquished property’ and the purchase and closing of the ‘replacement property’. Within the 180 days the investor must properly identify suitable replacement properties and close on one or more of these properties one or before the 180 days.
I will say that if the capital gains rates go up substantially there will be investors who will decide to liquidate, get out and pay the 15% rate prior to the rate increase. In fact, I expect to see quite a bit of this. For the purposes of this post, let’s assume that you’ve chosen to do the 1031 exchange and review the four primary rules.
Rule # 1 Both the relinquished property and replacement property must be held for investment purposes or used in a business and be ‘like kind’.
Rule # 2 The IRS requires the investor to identify the replacement property or properties within the 45 ‘identification period’. The identification period begins the day of closing of the relinquished property. The replacement properties much be properly identified by the Exchanger.
They may identify up to three replacement properties regardless of market value (Three Property Rule). Or they may identify unlimited number of properties provided that the total value not exceed 200% of the relinquished property (200% Rule. The minimum requirement is 95% of the value of the relinquished property
Rule #3 You must close on the replacement property the earliest of within 180 days of the closing of the relinquished property or the due date of the tax return or file an extension. And this is 180 calendar days … no time off for weekends or holidays. 1031 exchanges must be completed on time or pay boot.
Rule #4 On a delayed 1031 exchange, you must work with an IRS approved Qualified Intermediary.
See the attached for more detail.