1031 Exchange Rules: Disqualified Person - Atlas 1031 (2024)

FAQs

Who is a disqualified person in a 1031 exchange? ›

For purposes of a Section 1031 exchange, a disqualified person is someone who is considered an agent of the taxpayer at the time of the exchange. Family members, or related persons, of a disqualified person are also disqualified.

Under IRC §1031, the following properties do not qualify for tax-deferred exchange treatment: Stock in trade or other property held primarily for sale (i.e. property held by a developer, “flipper” or other dealer) Securities or other evidences of indebtedness or interest. Stocks, bonds, or notes.

If the taxpayer actually or constructively receives money or property which does not meet the requirements of section 1031(a) in the full amount of the consideration for the relinquished property, the transaction will constitute a sale, and not a deferred exchange, even though the taxpayer may ultimately receive like- ...

Failing to Have a Qualified Intermediary

The exchange must take place through a Qualified Intermediary (QI) and an exchange agreement needs to be signed prior to close of escrow. Anything else risks violating the rule against actual or constructive receipt of the exchange proceeds and may nullify the 1031 exchange.

Disqualified persons are defined as: Trustees or Directors; Officers; Foundation managers with similar powers to officers, trustees and directors (such as an Executive Director);

As the regulator of SMSFs, we can disqualify an individual from being a trustee (or director of a corporate trustee) of a self-managed super fund (SMSF) if: they don't comply with the super laws, or. we are concerned about their suitability to be a trustee.

The 95% rule says that a taxpayer can identify more than three properties with a total value that is more than 200% of the value of the relinquished property, but only if the taxpayer acquires at least 95% of the value of the properties that he identifies.

Now, only businesses, real investment property, and certain real estate fractional ownership structures qualify as like-kind. Personal property such as a primary residence, second home, or vacation home has never been eligible for a 1031 exchange.

Section 1031(f) provides that if a Taxpayer exchanges with a related party then the party who acquired the property in the exchange must hold it for 2 years or the exchange will be disallowed.

If you do not identify or acquire the replacement property within the 45 days, you are not able to complete a valid exchange. In addition to making sure you identify replacement property within 45 days, you must identify it unambiguously. That generally means using a legal description or street address.

How do you qualify for 121 exclusion? ›

In general, to qualify for the Section 121 exclusion, you must meet both the ownership test and the use test. You're eligible for the exclusion if you have owned and used your home as your main home for a period aggregating at least two years out of the five years prior to its date of sale.

The two most common situations we encounter that are ineligible for exchange are the sale of a primary residence and “flippers.” Both are excluded for the same reason: In order to be eligible for a 1031 exchange, the relinquished property must have been held for productive in a trade or business or for investment.

Disqualified persons may not serve as a taxpayer's intermediary. They include certain relatives and those who, within a two-year period prior to the exchange, have acted as the taxpayer's employee, attorney (for non-exchange related services), accountant, investment banker or broker, or real estate agent or broker.

Structuring A 1031 Exchange Will Defer A Gain Or Loss

Structuring the disposition or sale of any investment property as a 1031 exchange will require that the income tax consequence be deferred whether it is a gain or loss.

Generally, if you make a like-kind exchange, you are not required to recognize a gain or loss under Internal Revenue Code Section 1031. If, as part of the exchange, you also receive other (not like-kind) property or money, you must recognize a gain to the extent of the other property and money received.

A disqualified person is any person who was in a position to exercise substantial influence over the affairs of the applicable tax-exempt organization at any time during the lookback period. It is not necessary that the person actually exercise substantial influence, only that the person be in a position to do so.

Persons or entities that are agents of the taxpayer at the time of the transaction are disqualified from acting as a Qualified Intermediary (QI). § 1.1031(k)-1(k).

Under federal regulations for 1031 exchanges, practically anyone can become a qualified intermediary. There's no current federal regulation governing the industry as a whole.