Updated: May 13
With a properly constructed Section 1031 transaction, you sell your old property, buy the replacement property, and pay no taxes.
The IRS Code Section 1031 states that no gain or loss is recognized if the property
held for productive use in a trade or business or for investment is exchanged
solely for property of a like-kind to be held either for productive use in a trade o
business or for investment.
The Tax Cuts and Job Acts (TCJA) restricted the type of asset which qualifies for the Section 1031 tax-deferred exchange to real property only. Real property is defined by the state or local law where the property is located and the car includes:
I. Land used in business or held for investment purposes
2. Buildings held in a business or for investment purposes such as rental houses, apartments, hotels, motels, shopping centers, office buildings, factories, etc.
3. Other inherently permanent structures such as in-ground swimming pools,
fences, parking areas, roads, bridges tunnels, etc.
4. Structural components such as walls, partitions, doors, central air
conditioning and heating, etc.
1031 exchanges must be done with like-kind properties. The rules for like-kind properties have evolved over the years. In 1984, the definition of like-kind property was dramatically expanded. You now have the option to sell a rental house and buy a small apartment building. Prior to the rule change, you did not have to trade a house for a house, but a three-story apartment building for another three-story apartment building.
You can identity up to three potential properties to buy as long as you close on one of them. The federal regulations limit the rollover process to up to three properties.
You can identify any number of replacement properties long as their eventual combined fair
market value is not more than 200% of the relinquished property, For example, if you sell a
property for $500,000 then the combined market value of the purchase should not be more than twice that or $1 million.
180 DAY DEADLINE
Once the replacement property is selected, the investor has 180 days from the date of the original the property was sold to close on the replacement property.
45-DAY TIME LIMIT
There is a strict 45-day time limit. You must either close on or identify and report on the potential replacement property within 45 days of selling the original property.
This time limit includes weekends and holidays.