Breckenridge and Keystone real-estate owners learning about the 1031 tax-deferred exchange must be familiar with the rules and timelines. Every game has rules and, when followed correctly, they lead to a successful transaction for owners of Keystone and Breckenridge real estate.
What are the 1031 exchange rules? First of all, the real property being sold and the real property being bought must both be held for productive use in a trade or business or for investment purposes and must be of like kind. Secondly, the proceeds from the sale must go through the hands of a qualified intermediary and not through the hands of buyer or seller or their agent. If that happens, all the proceeds become taxable.
Another rule is that all the cash proceeds from the original sale must be reinvested in the replacement property; any cash proceeds that are retained will be taxable. And, the replacement property must be subject to an equal level or greater level of debt than the relinquished property. If it isn’t, then the buyer will either have to pay taxes on the amount of the decrease or put in additional cash funds to offset the lower level of debt in the replacement property. And finally, the timelines must be carefully followed.
The 1031 Timeline includes an Identification Period and the Exchange Period as follows:
Identification Period: Within 45 days of selling the relinquished property, the seller must identify suitable replacement properties. This 45-day rule is very strict and is not extended if the 45th day falls on a Saturday, Sunday, or legal holiday.
Exchange Period: The replacement property must be received by the taxpayer within the "exchange period," which ends within the earlier of a) 180 days after the date on which the taxpayer transfers the property relinquished, or b) the due date for the taxpayer tax return for the taxable year in which the transfer of the relinquished property occurs. This 180-day rule is very strict and is not extended if the 180th day should happen to fall on a Saturday, Sunday or legal holiday.
The replacement-property identification has its own set of rules.
3-property rule: Three properties may be identified as possible replacements for the relinquished property. More than 95% of exchanges use the 3-property rule.
200% rule: Any number of properties may be identified as possible replacements for a relinquished property as long as the aggregate value of those properties does not exceed 200% of the value of the relinquished property.
95% exemption: Any number of properties may be identified as possible replacements for a relinquished property as long as the buyer ends up purchasing at least 95% of the aggregate value of all properties identified.
And, finally, here are some rules and examples for Like-Kind Property. It is possible to exchange any real property for any other real property within the United States or its possessions if said properties are held for productive use in trade or business or for investment purposes. Examples of like-kind property include apartments, commercial, condos, duplexes, raw land, and rental homes. As used in IRC 1031(a), the words "like-kind" mean similar in nature or character, notwithstanding differences in grade or quality. One kind of class of property may not, under that section, be exchanged for property of a different kind or class.
Examples of qualified like-kind exchanges are exchanging an apartment building for farm/ranch, exchanging an office building for a hotel, exchanging raw land for retail space, and exchanging unimproved property for commercial property. (Continued in 1031 Exchange, Part 3)
Articles © Copyright 2006 by The Walsh Group
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