1031 Exchange Basics
Property Status
If the Relinquished Property (the property you are selling) is in escrow, immediately contact an Exchange Accommodator. Once escrow closes, unless appropriate measures were taken, you will be disqualified from conducting an exchange.
Property Qualifications
Your property must be held for productive use in trade or business or for investment. A personal home can be converted to qualify, but it is a lengthy process and should be discussed with a qualified professional early on.
Identification 45 Day Rule
The Identification Period begins on the date the Relinquished Property closes escrow and ends at midnight on the 45th day thereafter. The Replacement Property must be identified in a signed writing, unambiguously describing the property, and must be delivered to a party to the exchange. Identification may be made pursuant to the 3 Property Rule or the 200% rule.
The 3 Property Rule
The 3 Property Rule allows for identification of up to three U.S. properties, without regard to fair market value of the properties.
The 200% Rule
The 200% Rule allows for identification of four or more properties as long as the combined value of all properties identified does not exceed 200% of the fair market value of the Relinquished Property.
Deferral of All Capital Gains Tax
To defer all capital gains tax, an Exchangor must reinvest 100% of the sales price of the Relinquished Property in a property (or properties) of equal or greater value. This means that if the property was mortgaged, the Exchangor will have to come up with the cash for the difference or will need to obtain another mortgage to reach the sales price.
What if I don't want to invest all of the cash?
If an exchange is otherwise in compliance with all relevant I.R.S. guidelines, only the portion of cash received by the Exchangor will be subject to taxes. The tax consequence occurs the year the cash was received.
Timeline 180 Day Rule
Day one of the exchange begins on the date of close of escrow on the Relinquished Property. An exchange client must complete purchase of the Replacement Property by day 180. The only exception is a Presidentially declared federal disaster that specifically extends this timeline.