IRS 1031 Exchange Requirements

We know how popular our 1031 Exchange blogs are, so we’re providing you with more information! In this blog, we’ll cover the requirements and rules needed to make a 1031 exchange work. 

The IRS specifies that the property must be of like-kind by “the same nature or character, even if they differ in grade or quality.” The properties must be used for the same purpose. This is great if you’re an investor since two investment properties will be considered like-kind. 

Like-kind property is defined as property that has the same nature, character, or class. So this means you can exchange a small office building for a small apartment complex, vacant land, or a larger office building. This is possible because they only need to share one of the same, whether that’s nature, character, OR class. So there’s some freedom with this requirement and it is more flexible than you might imagine. 

Another requirement is the property needs to be of equal or greater value for the property you’re purchasing. Remember that this applies to the mortgage as well, so both the value of the property and the mortgage on the property you’re buying must be equal or greater than the value and mortgage of the property you’re selling.  If you sell a property for $750,000 with a $500,000 mortgage and buy another for $810,000 with a $650,000 mortgage, this exchange qualifies. What doesn’t qualify is if you sell the property for $750,000 with a $500,000 mortgage, and you buy another for $650,000 or $750,000 with a $450,000 mortgage. 

Both properties that are sold and bought need to be purchased by the same party or same taxpayer. If the names are different on the sale property and the exchange property, it will be invalid. 

Both properties have to be investment or business properties to fit the 1031 exchange requirement. It means you can’t sell a personal residence to purchase an investment property. This works both ways, so you also can’t sell an investment or business property to buy personal property. 

The day you close on the sale of the first property is the beginning of the process. Once started, you have 45 days to choose three potential replacement properties. They must fit the 1031 exchange requirement by being a like-kind property, as mentioned in requirement #1. By day 180, the property should be sold, and the exchange completed to receive the 100% tax deferment. 

While it’s important to consult your tax professional who understands the totality of your financial picture, if you’re a real estate investor wanting to defer capital gains taxes, contact our team at Boise Turnkey Properties today. We would be honored to help you through the 1031 exchange process personally. Call us today at (208) 957-0870, email us at corby@boiseturnkey.com, or fill out the form below.