What Qualifies as a 1031 Exchange (2024)

FAQs

What would qualify as a 1031 exchange? ›

To qualify as a 1031, both properties involved in the exchange must be “like-kind,” meaning they must be of the same nature, character, or class as defined by the IRS. A few key points to know: Most real estate properties are classified as like-kind.

Examples of property that does not qualify for tax-deferral treatment under Section 1031: Personal use properties. Property held for sale, such as spec homes, building lots and “flips” Partnership interests. Stocks, including that of a Real Estate Investment Trust (REIT), and bonds.

What disqualifies a 1031 exchange? A 1031 exchange can be disqualified if the property being exchanged is not used for business or investment purposes, if the exchange is not completed within the specified timelines, or if the exchange does not meet IRS regulations.

For example, an apartment building would generally be like-kind to another apartment building. However, real property in the United States is not like-kind to real property outside the United States.

The Regulations allow identifying multiple properties. A Taxpayer may identify as many as 3 alternate properties of any value. If more than 3 properties are identified, the value of the 3 cannot exceed 200% of the value of the Relinquished Property unless 95% of the properties identified are acquired.

The 1031 Exchange allows you to indefinitely defer the payment of your capital gain and depreciation recapture taxes when you sell real estate or personal property and reinvest in replacement property. You keep all of your money invested and working for you instead of paying Federal and state taxes.

A delayed exchange is the most common type of 1031 exchange. In this scenario, you sell your existing property and then have 45 days to identify a replacement property. You then have 180 days to close on the replacement property.

The taxpayer and the related party must hold the properties that each received as part of the 1031 Exchange transaction for a minimum of two (2) years. The two (2) year holding period starts running on the date of the transfer or conveyance of the last property involved in the 1031 Exchange related party transaction.

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.

Can I use a 1031 exchange to pay off another investment property? ›

Technically, you can't use a 1031 exchange to pay off a property you already own. Under a typical 1031 exchange, the taxpayer can defer income tax liability and capital gains by exchanging property for another like-kind replacement property as dictated by the Internal Revenue Service (IRS) for a specific period.

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.

The qualified intermediary holds your sale proceeds in escrow until the exchange is complete. Choose your qualified intermediary with care so you don't lose money, miss key deadlines or end up paying taxes.

A 1031 exchange is a strategy in real estate investing where an investor can defer paying capital gains taxes on an investment property when it is sold as long as another "like-kind property" is purchased with the profit gained by the sale of the first property.

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.