Q: May I use my personal residence or vacation home in a 1031 exchange?


No; IRC regulations require that the relinquished property not be the investor’s primary residence. A vacation home, however, may qualify under certain circumstances, depending on how regularly the home is used. To find out whether your vacation home would qualify for an exchange, consult a Peak 1031 Exchange, Inc. exchange specialist.

Q: Can I exchange personal property?


No. Personal property may no longer be exchanged under the Internal Revenue Code.

Q: Would I need to modify my sale or purchase contracts when carrying out a 1031 exchange? When listing the property, does my realtor need to make mention that is a 1031 exchange?


No; the IRS does not require that the sale or purchase contracts be modified when carrying out an exchange. However, you will need to inform your realtor of the exchange and include a passage in the contract to inform the buyer or seller (depending on upleg or downleg) that you are conducting a 1031 exchange.

You may find the following example helpful for writing your own passage in the contract; however, you should consult with your Certified exchange specialist before including your own cooperation clause:

“Buyer {or Seller} is aware that Seller {or Buyer} intends to conduct an IRC 1031 exchange at no cost.

Q: I have identified a replacement property but have not yet sold my own property. Can I still legally do a 1031 exchange?


Yes; in this case, the exchange would be recognized as a Reverse Exchange. A Reverse Exchange can get much more complex than a more standard Delayed Exchange due to various legal requirements.

Q: Is it required to have a mortgage on the replacement property?


No; it is not required to have a mortgage on the replacement property purchased in an exchange.

Q: What rules do I have to follow in order to receive a full tax deferral benefit?


In order to fully defer all capital gains taxes through a 1031 exchange, the following stipulations must be met:

“Like-Kind” Property –  The exchange must consist of a relinquished property and replacement property or properties which are of like-kind in nature.

45 day and 180 day Periods –  All specified deadlines must be met.

The Napkin Rule – The value of the replacement property or the sum value of the replacement properties must be of equal or greater value than the value of the relinquished property

All Proceeds Rule – All proceeds from the sale of the relinquished property must be used in the purchase of a replacement property to qualify for a full tax deferral.

Q: What qualifies as “like-kind” property?


Two properties are considered of like-kind in nature if they are of similar character. In other words, all real property can be exchanged with other real property. For example, a rental condo may be exchanged with a farm and an office building may be exchanged for a piece of vacant land. Additionally, all personal property can be exchanged for other personal property.  (Note: there are some limitations with the exchange of personal property.)  As long as the property, real or personal, is used for income or investment purposes, it can be exchanged.

Q: If the 45th or 180th day happens to fall on Christmas or Easter, do I get an extension?


Unfortunately, the IRS does not give any extensions even if the 180th or 45th day falls on weekends or holidays. The time interval includes all calendar days.

Q: How long do I have to purchase the replacement property?


IRS regulations stipulate that there is a 180 day exchange period starting from the date of the relinquished property sale. The investor has until the end of the 180 day period or until the date the investor’s tax return is due (whichever occurs first) to purchase a replacement property. (Note: The exchange is considered complete when ownership of the property is transferred from seller to buyer).

Q: What is a replacement property?


A replacement property refers to the property that is exchanged for the relinquished property. All proceeds from the relinquished property must be transferred to the purchase of the replacement property, which must be of equal or greater value than the relinquished property.

Q: How long do I have to identify my replacement property?


The IRS allows for a 45 day time interval for identifying the replacement property. From the day of the sale of the relinquished property, the investor has 45 days to identify their replacement properties. (See Rules and Timelines regarding identification).

Q: Can I hold the proceeds from the sale of the relinquished property or have the settlement agent hold the proceeds?


In an exchange, all proceeds from the relinquished property must be held by a qualified intermediary such as Peak 1031 Exchange,Inc. If you, as the investor, have any control over the proceeds, there will be tax consequences in accordance with §1031.