1031 Exchange Rules and Timelines
If the relinquished property is in the United States, then the replacement property (property purchased with the proceeds from the sale of the relinquished property) must also be in the United States. Foreign property exchanges are permitted as long as both the relinquished and replacement properties are outside of the United States.
The properties must be of “like-kind”in nature and with respect to real property, all real property is considered “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 deferred 1031 exchange, the replacement property must be of equal to or greater than the value to the relinquished property. 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 a trade or business, or for investment.
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 relinquished property must be the same investor purchasing the replacement property.
IRC §1031 requires that a replacement property must be identified within 45 days of the closing date of the relinquished property being sold. Any replacement property must be purchased before the180th day of the sale of the exchanged property or by the exchanger’s tax return due date of that year; whichever comes first.
Rules of Identification
One of the three following rules must be adhered to when identifying a replacement property:
Three property rule: The exchanger may identify up to three potential replacement properties without regard to fair market value.
200% Rule: The exchanger may identify more than three properties as long as their aggregate fair market value at the end of the identification period does not exceed 200% of the aggregate fair market value of all the relinquished property as of the date of transfer.
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 value of the identified properties.