For a 1031 exchange to be in accordance with IRC § 1031, within 45-days of the close of the sale of the Relinquished Property the exchanger must identify their potential replacement property(ies) in writing to the qualified intermediary. The replacement property(ies) description must be unambiguous and specific using a physical address or legal description.

A 1031 exchange, also known as a like-kind exchange or tax deferred exchange, is where real property that is “held for productive use in a trade or business or investment” is sold and the proceeds from the sale are reinvested into a like-kind property intended for business or investment use, allowing the exchanger, or seller, to defer the capital gains tax and depreciation recapture on the transaction.

While a taxpayer cannot utilize a traditional, forward 1031 exchange when they are looking to buy replacement property prior to selling the relinquished property, they might be able to utilize a Reverse Exchange.

One of the most common questions asked is whether or a not a vacation property qualifies for a 1031 exchange. There are three basic rules for including a vacation home in a 1031 exchange that were introduced by the IRS in 2008. 

In order to defer ALL capital gains and depreciation recapture taxes from the sale of the Relinquished Property the taxpayer must pay an equal or higher price for the Replacement Property than the Relinquished Property was sold. Should any debt or amount not be reinvested this portion, called boot, would be taxable.  

The tax-deferred like-kind exchange under Internal Revenue Code Section 1031 is one of the most powerful tools available to preserve capital and build wealth. Section 1031 exchanges allow real estate investors to defer capital gains (and potentially other) taxes when they exchange one or more qualified relinquished properties for one or more qualified replacement properties. Among the many rules governing this process, one that often causes confusion – but is absolutely critical – is the “Same Taxpayer Rule.” 

Below is a simple guide that can help determine if your situation qualifies for a 1031 exchange and if a 1031 exchange seems like the best option for your upcoming real estate transaction.

Since 1991, IRC § 1031 has required the use of an impartial third party to hold the proceeds from the Relinquished Property sale until the close on the Replacement Property. This third party is known as a qualified intermediary.