1031 Basics and Definitions

Important Timelines 45/180 days:

A 1031 Exchange is applicable when the property in question falls within the ‘like kind’ definition and when the investor has a recognizable gain*.  The investor must identify up to three properties potential properties within 45 days of close of sale escrow and then BUY another property of ‘like-kind’ within 180 calendar days following the close of escrow from the SALE.  *Note: Property does not have to appreciate in value to have a gain!  The property may have ‘built-in’ gain as a result of a previous exchange or from depreciation taken.  It’s important to exercise due diligence and to consult with a professional legal/and or tax advisor.

Top three rules to identify property:

• The Three Property Rule…Three replacement properties of any individual or combined value. One or more of the three named properties can then be purchased as qualifying replacement property.
• The 200% Rule…Name as many properties as desired as long as the total value of all properties does not exceed 200% of the sales price of property #1.
• The 95% Rule… Name as many properties as desired regardless of total value (even exceeding the 200% Rule described above), as long as the investor ultimately buys as their replacement property at least 95% of the total value of all properties named under this method.

Equal or greater in purchase price:                                                         

To receive full non-recognition of capital gain you need to spend equal or greater the amount of the exchange value.

Equal or greater in debt: 

To be fully tax deferred, the investor must re-invest in a property that is equal to, or greater than, the sales price of the property that is being relinquished.  EG: If you are selling a rental house for $500,000 with $200,000 in equity, you must purchase a new property with a price of at least $500,000 and equity of at least $200,000. If you choose to go down in value or choose to pull some equity out, an exchange is still possible but you will have tax exposure on the reduction. The value and equity numbers are net after paying “normal transactional costs.”

‘Like Kind’:

Under the current IRS Code Section 1031 – ‘Like Kind’ property can include property that is held for productive use in a trade or business, or, property that is held for investment.  ‘Like Kind’ property can include, but is not limited to, any of the following provided it is held for investment: commercial, single family rental property, condos, raw land, apartments, vacation homes, second homes, duplexes, industrial properties and a leasehold interest of 30 years or more. NOTE: A person’s PRIMARY RESIDENCE does NOT come under the rules of Section 1031, and is specifically EXCLUDED, as is property held ‘primarily for resale’.