Know the rule before the deadline starts
Section 1031 can defer gain on an exchange of qualifying real property. The taxpayer must follow the property, document, and time requirements.
The rules are strict. A late document or an incorrect funds transfer can change the tax result.
Review the transaction before the relinquished-property transfer. Use a tax advisor and attorney for tax and legal decisions.
Property that can qualify
Section 1031 applies to real property that the taxpayer holds for investment or productive use in a trade or business.
Real property held primarily for sale does not qualify. Personal-use real property also does not qualify under the general rule.
Real property in the United States is not like-kind to real property outside the United States.
The nature or character of the real property controls the like-kind test. Grade or quality does not control that test.
Qualified Intermediary timing
Contact a Qualified Intermediary before the relinquished-property sale closes. The exchange agreement and applicable assignments must exist before the transfer.
Do not receive or control the sale proceeds. Actual or constructive receipt can cause the transaction to be a sale.
A Qualified Intermediary must not be a disqualified person. The Qualified Intermediary must sign a written exchange agreement with the taxpayer.
The 45-day identification period
The identification period starts on the date that the taxpayer transfers the relinquished property. The period ends 45 days after that date.
The taxpayer must identify replacement property in a signed written document. The document must describe the property in a clear and recognizable manner.
The taxpayer must send the document to a recipient permitted by the federal rules no later than the end of the period.
Ask the Qualified Intermediary and tax advisor to confirm the permitted recipient.
Federal rules generally permit these identification methods:
- Identify a maximum of three properties without regard to value.
- Identify more properties when their total value does not exceed 200 percent of the relinquished-property value.
- Use the 95-percent rule when the first two methods do not apply.
Ask a tax advisor to review the selected method and each identified property.
The exchange period
The taxpayer must receive the replacement property no later than the end of the exchange period. It must be substantially the same identified property.
The exchange period ends on the earlier of these dates:
- The 180th day after the relinquished-property transfer.
- The federal tax-return due date for the transfer year, with valid extensions.
The ordinary federal periods use calendar days. A weekend or holiday does not automatically move the deadline.
Special disaster relief can change a deadline for an eligible taxpayer. Ask a tax advisor to confirm current relief.
Money and non-like-kind property
Money or non-like-kind property can cause recognized gain. Tax professionals often use the informal term boot for these items.
Liabilities can also affect the result. Debt relief can be treated as money for part of the gain calculation.
The taxpayer's tax advisor must calculate gain, basis, liabilities, and tax. The Qualified Intermediary does not replace that analysis.
Ownership and related parties
The taxpayer and the advisors must review the owner of each property. Entity changes can affect the proposed exchange.
An exchange of a partnership interest does not qualify as a like-kind exchange. Real property that a partnership owns needs separate planning.
Related-party exchanges have additional rules. Some later transfers can cause deferred gain to become taxable.
Does day 45 move when it falls on a weekend?
The ordinary federal identification period uses calendar days. A weekend does not automatically move the deadline.
Is the exchange period always 180 days?
No. The federal tax-return due date can end the exchange period before day 180.
Can I change an identification?
You can revoke a written identification before the identification period ends. The revocation must satisfy the applicable written-delivery rules.
Can I identify more than three properties?
Federal rules permit other methods. The 200-percent rule and 95-percent rule have specific value and receipt requirements.
Can the exchange team give tax advice?
The exchange team can explain its process and documents. Your tax advisor and attorney must approve tax and legal conclusions.
Review your dates and documents
Contact the exchange team before the sale closes. Ask your tax advisor and attorney to review the complete transaction.
This page gives general federal information. It does not give tax, legal, investment, accounting, or financial advice.