There are rules and guidelines that determine what constitutes a valid exchange. The first stipulates the exchange must be between qualifying properties of like kind. Most real estate, held for use in the trade of business or for investment, will qualify with the exception that they must both be within the borders of the U.S.
There is a 180-day window during which the seller involved in the transaction must search, identify and close on the purchase of the new property in order for the 1031 exchange to be valid. While more than one property may be identified initially, the property being purchased must be identified as part of the exchange no more than 45 days from the time the seller’s property is relinquished and closing on the new property must be complete within 180 days of the transfer.
The total purchase price of the property to be acquired must be equal to or greater than the total net sales price of the property being relinquished and all of the equity received from the transaction must be used to acquire the property targeted in the 1031 exchange. If the replacement property purchase price is less than the relinquished property, a tax will be applied to the difference. It’s also important to know that the net equity in the replacement property must be equal or greater than the net equity in the property sold, or the purchaser will be required to pay the tax on the amount of decrease.
Finally, the sale must also go through a qualified intermediary. These intermediaries are companies that work full time facilitating such exchanges. A qualified intermediary needs to be an independent organization that will handle the funds from the original sale through the exchange process and then deliver the money to the closing agent. The intermediary will also be responsible for filling out all of the appropriate tax forms and exchange agreements related to the process.
We have a great deal of experience with 1031 exchanges and are happy to assist you with selecting a quality intermediary.
For more information about 1031 exchanges please Contact us.
The link below will take you directly to the IRS website where you can get the information directly from them (If you like to read lawyer jargon).