1031 Exchange Requirements

 

  • The way the IRS determines how a property has been used usually hinges on how it’s been declared on tax returns. If you wish to re-characterize a property, simply use it differently. For example, a vacation home can be re-characterized from personal to business use simply by renting it out for a couple of years.
  • 1031 exchanges can also be used to help facilitate splitting up partnerships, joint ventures, and other types of co-ownerships of property without triggering unwanted taxes. If one party wants out of such an arrangement, he or she could simply receive the appropriate portion of the sales receipt, paying his or her own taxes, while the other(s) exchange property.
  • There are too many requirements, rules, exceptions, time restrictions, and other formalities governing 1031 exchanges to explain them all here. A qualified professional should always be consulted to help lead you through this often-complicated process.
  • Nevertheless, the basic requirements for making a fully tax-deferred 1031 exchange fall in to six general categories:
    • Properties exchanged must be for business use or held for investment.
    • The price of the replacement property must be equal to or higher than that of the relinquished property.
    • The amount of the mortgage on the replacement property must be equal to or higher than that on the relinquished property.
    • The taxpayer must not get actual or constructive receipt of the proceeds.
    • Qualified intermediaries or accommodators must be used to facilitate the exchange.
    • Identification and closing time requirements must be met.

Disclaimer: This article is provided for information use only. It does not take the place of an attorney, a tax advisor, or an accountant. Always seek out the advice of a licensed professional before undertaking any significant change in your financial situation.