.jpg) RULES AND TIME RESTRICTIONS
At AFC, we translate the rules the IRS lays out into easy guidelines anyone can understand.
- If the relinquished property is in the United States, then the purchased property must be also in the United States. Foreign property exchanges are permitted as long as both the relinquished and purchase properties are outside of the United States.
- The properties must be of like-kind nature; in other words, in regards to real property, all real property is like-kind. The IRS does not specify the quality or grade the two properties must have.
In order to obtain the full benefit of a tax deferral, the replacement property must be of equal or greater value to the relinquishedproperty
The relinquished and replacement properties cannot be used by the investor as a primary residence and dealer property held for resale cannot be exchanged. The property sold and the property purchased must be for productive use in, or investment or income purposes.
All proceeds from the sale of the relinquished property must go directly to the Qualified Intermediary and eventually, to the purchase of the replacement property
The investor selling the relinquishedproperty must be the same investor purchasing the replacement property
Closing Dates To Be Aware of
IRC §1031 demands that a replacement property (property being purchased with the sale proceeds) must be identified within 45 days of the relinquished property being sold. Unless an extension is filed with the IRS (Note: IRS grants extensions only during natural disasters or for few other emergencies but will not grant extensions on a case by case basis), the replacementproperty must be purchased before the 180th day of the sale of the exchanged property or by the exchanger’s tax return due date of that year; which ever comes first.
Rules of Identification
One of the three following rules must be adhered to when identifying your replacement property:
- Three property rule The exchanger may identify up to three potential replacement properties without regard to fair market value
- 200% Rule Given that their combined fair market value does not exceed 200% of the value of the relinquished property, the exchanger is permitted to identify more than three properties
- 95% Rule The exchanger may identify any number of properties, regardless of combined fair market value, on condition that the exchanger purchases 95% of the combined values of those properties.
Common Misconceptions
- I can extend the deadlines for 1031 Exchange because I am having difficulty meeting the 45 and 180 deadlines.
Generally, there are no extensions given for the 45 and 180 day time periods. Some exceptions include declared matters of emergency such as natural disasters or terrorist attacks. IRS, however, does not grant extensions on a case by case basis.
- By using a 1031 Exchange, I will never have to pay the taxes that I would otherwise have to pay.
A 1031 Exchange is a tax deferral strategy; not a tax exemption. As capital is transferred from one property to another, a gain is not recognized by the IRS and thus capital gains taxes are deferred. However, through continuous planning, an exchanger may be able to turn tax deferrals into tax savings.
- The 1031 Exchange is a loophole in the IRC (Internal Revenue Code)
A 1031 Exchange is a legitimate tax deferral solution which was introduced into the tax codes to stimulate investment and is not a loophole in the IRC.
- There is only one type of exchange which is considered legal by the IRS
There are several types of 1031 Exchanges such as a forward delayed exchange and a reverse exchange which the IRS recognizes as valid exchanges. Each type of exchange suits a particular exchanger. Contact an AFC Specialist to find out if an exchange and what type would benefit your situation. A Qualified Intermediary provides “safe harbor protection” for the 1031 Exchange.
- I can perform a 1031 Exchange without the use of a Qualified Intermediary such as Accommodator Finance Company
Proceeds from the sale of the relinquished property must be held by a Qualified Intermediary or the IRS may review the case and invalidate it.
- In order to meet the “like-kind” property rule, properties exchanged must be the same type and similar quality.
Any real property is recognized as “like-kind” property in the eyes of the IRS. A farm could be exchanged for a shopping center or a condo could be exchanged for a piece of vacant land as long as both properties are used for investment or income purposes.
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