1031 Tax Exchange Requirements
A Guide to Successful Deferral
To successfully navigate a 1031 Tax Exchange, you must adhere to these key 1031 Tax Exchange Requirements. Learn more with Best 1031 Online.
1. Property Use: The relinquished property must be held for investment purposes or used in productive trade or business.
2. Replacement Property Identification: Within 45 days of the relinquished property’s closing escrow, you must identify potential replacement properties using one of the following 1031 Tax Exchange Requirements:
3 Property Rule
Allows the identification of one, two, or three properties regardless of their individual value. You can ultimately acquire any or all of the identified properties.
200% Rule
Permits the identification of more than three properties, but the combined value of all identified properties cannot exceed 200% of the relinquished property’s value. Similar to the 3-Property Rule, you can acquire any or all of the identified properties.
95% Exception
Even if you exceed the limits of the above two rules, a valid 1031 Tax Exchange is still possible if you acquire a total value of at least 95% of the combined value of all identified properties.
3. Closing Timeline: You have a maximum of 180 days from the relinquished property’s closing to finalize the purchase and closing of your replacement property.
4. Qualified Intermediary: Utilizing a Qualified Intermediary (QI) is mandatory. A QI acts as a neutral third party who hasn’t advised you in the past two years and holds all the sale proceeds until the exchange closes. Secure your QI before the relinquished property sale closes.
5. Reinvestment Requirements: To achieve complete tax deferral, you must:
- Invest an equal or greater value into the replacement property compared to the relinquished property.
- Reinvest all sale proceeds from the relinquished property.
- Replace the value of any debt (equal or greater) that was associated with the relinquished property.
6. Title Requirements: Ensure the same taxpayer ID is used on both the relinquished and replacement properties. By adhering to these 1031 Tax Exchange Requirements and complying with all IRS regulations, your exchange should qualify for complete tax deferral.
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