1031 Exchange Requirements
Coming to talk about 1031 Exchange Requirements, it can be both a way of adjusting investment portfolios and a powerful wealth-building tool to more precisely indicate lifestyle choices and incidents. An example to explain this further would be an apartment owner say, Sam, wanting to business/trade into net lease properties that do not require management.
In brief 1031 Exchange Requirements means the section of the Internal Revenue Code that provides for the tax-deferred exchange of personal and real property.
The title of the property consisting of the name of the investor/taxpayer and the tax return who sells should be the taxpayer who buys.
Property Identification Timeline
Post-closing of the first property, the Exchanger gets 45 days to identify possible replacement properties and a maximum of 180 days to acquire the replacement property.
Three property rule –Any three properties can be identified irrespective of value.
Two hundred percent rule –Any number of properties can be identified until the time their consolidated fair market value (FMV) does not surpass 200% of the FMV of the relinquished properties.
The property needs to be acquired within 180 calendar days following the closing of the first property–or extension of the Exchanger’s tax return when the relinquished property closes after October 15th— the property needs to be acquired.
The value of the replacement real estate must be equal to or greater than the value of the relinquished real estate to defer 100 percent of the tax. Otherwise, the Exchanger will be subject to taxes on the difference, commonly referred to as a partial exchange. The debt and equity on the replacement real estate must be equal to or greater than the debt and equity on the relinquished real estate. Debt is offset by additional equity or cash in the replacement property. Additional debt does not offset equity.
Fact Patterns and Intent
As per 1031 exchange guidelines, there is no hold time; however, the Internal Revenue Service checks if a property was acquired immediately before the exchange. Time becomes a crucial aspect in the 1031 Exchange that supports the intent to hold for investment. If time is shorter, then the facts need to be more substantial to support the intent.
- The term “related party” or “related person” is defined as any person or party, including entities, that are related to the taxpayer described in Section 267(b) or Section 707(b)(1) of the Internal Revenue Code (IRC), including:
- Family members (siblings, spouse, ancestors, and lineal descendants)
- A Corporation in which 50 percent of majority share is owned directly or indirectly by or for one individual
- Two (2) corporations which are part of the same controlled group (as defined in subsection (f))
- A fiduciary and a granter of a trust
- A beneficiary of a trust and a fiduciary of the same trust
- Corporation in which more than 50 percent of the value of the stock is directly or indirectly owned by or for one trust or by or for the grantor or fiduciary of the trust
- An organization suited under Section 501 of the Internal Revenue Code (relating to certain educational or charitable non-profit organizations) which is managed directly or indirectly by a person
Related Party Transactions
Related Party 1031 Exchange transactions happen when investors sell their relinquished property to a person related or if they buy a like-kind replacement property from a related party. Related party 1031 Exchanges are allowed provided specific rules and guidelines issued by the Internal Revenue Service are followed.
If the old property is traded to a related party, the property must be kept for two years before selling, or the tax-deferred by the 1031 exchange is due. Investors can buy the replacement property from a related party only if they are also participating in a 1031 exchange.
Related parties cover, but are not limited to, direct family members, such as brothers, sisters, spouses and descending and ascending lineal descendants. Related parties do not include stepparents, cousins, nephews, nieces, uncles, aunts, in-laws, and ex-spouses.
1031 Exchange enables your money to churn the maximum profit for you. However, the exchange process is extremely complex in nature and it would be wise to seek guidance from expert professionals. We have extensive experience in handling highly profitable exchanges for our varied client base.
For consultation and assistance regarding 1031 exchange call 888-993-2835 or email us at info@1031Xchange.com