1031 Exchange
A Section 1031 exchange can defer recognition of gain when qualifying business or investment real property is exchanged for like-kind real property.
Exam Tip
For a deferred exchange, identify within 45 days. Receive by the earlier of day 180 or the return due date including extensions.
What qualifies
Section 1031 applies to real property held for investment or productive use in a trade or business. Property held primarily for sale is excluded. U.S. real property is not like-kind to foreign real property. A qualifying exchange can involve different types of real property, such as an investment lot and a rental building.
Deferred exchanges
Identify replacement property in writing within 45 days after transferring the relinquished property. Receive it by the earlier of 180 days after transfer or the due date, including extensions, of the tax return for the transfer year.
A qualified intermediary is a common regulatory safe harbor for a deferred exchange. An eligible intermediary works under a written exchange agreement and limits the taxpayer’s ability to receive or control the proceeds. Actual or constructive receipt of proceeds can trigger current gain or prevent deferred exchange treatment.
Identification rules
| Rule | Limit |
|---|---|
| Three-property | Identify up to three properties regardless of value. |
| 200% | Identify more than three if the total fair market value does not exceed 200% of the relinquished properties’ value. |
| 95% | If the first two limits are exceeded, acquire at least 95% of the aggregate fair market value of all identified properties under the regulation. |
Cash, unlike property or net debt relief may produce currently recognized gain, subject to the Form 8824 calculation. The replacement property’s basis reflects the exchange and any relevant adjustments. Related-party exchanges have additional rules.
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