Exchange Requirements

Exchange Requirements

To have a valid exchange which will qualify to defer tax under Section 1031 of the Tax Code the following is required

  • Exchange Rather Than Sale – Relinquished property must be exchanged for replacement property. Using a qualified intermediary, relinquished property can actually be sold as long as the qualified intermediary retains control of all proceeds of the sale until such funds are used to acquired replacement property.
  • Compliance With All Time Requirements – Failure to comply with the time requirements of Section 1031 will almost always disqualify the exchange.
  • Qualified Property – Only investment property or property held for use in a trade or business qualify can qualify for tax deferral. A personal residence does not qualify.
  • Like-Kind Property – Replacement property must be on a “like-kind” as the property given up. Fortunately, the Tax Code defines “like-kind” real estate as any real estate within the United States. Therefore any kind of real property located in the United States can be exchanged for any other kind of real estate. A farm for a shopping center. A high rise for a residential condo. Etc.

To fully defer all taxable gain the following guidelines must be met:

  • The value of replacement property must be equal to or greater than the value of the relinquished property.
  • The equity in the replacement property must be equal to or greater than the equity in the relinquished property.
  • The debt on the replacement property must be equal to or greater than the debt on the relinquished property.
  • All of the net proceeds from the sale of the relinquished property must be re-invested in the replacement property.