A 1031 exchange is a real estate tax deferral method that allows the investor to sell the property and buy a new property to defer the taxes. In order to complete the 1031 exchange, there are few rules to be followed.
What Are the 1031 Exchange Rules for 2021?
1. Time Restrictions
The 1031 exchange starts on the earliest date related to both of the accompanyings:
• The possession date is reassigned to the buyer of the property
• The deed records date
Moreover, it finishes on the earliest date associated with both of the accompanyings:
• The date your return is due
• 180 days after the Exchange starts
2. Title Rule
This 1031 exchange rule requires the taxpayers recorded on the new property to be the individuals who were recorded on the old property.
3. Reverse Exchange
As one type of real estate 1031 exchange, a reverse exchange does not allow an investor to own both the properties. A property cannot be the one you are buying and the one you are selling at the same time.
4. Intermediary Requirements
A property owner who wants to do a 1031 exchange cannot have access to the funds when the sale of the old property and the purchase of the new property takes place. A qualified intermediary, an independent third party, must be involved to complete the procedure.
5. Reinvestment Requirements
The investor has the option of doing a partial exchange instead of reinvesting 100% of the proceeds into another property.
6. Like-Kind Property
Under the like-kind requirement, the property the investor purchases and the property they sell must be like-kind. Meaning the two properties must be the property held to be used in business, investment, or trade. It is not applied to personal use properties such as a vacation home or second home.
Now comes the question, then what is the time period to complete the 1031 exchange.
There is a strict timeline for performing the 1031 exchange. Under 1031 exchange, there are a 45-Days identification period and 180-Days Exchange periods that start with the transfer of the relinquished property for the buyer. When the Agreement for replacement property is signed, one needs to be sure that the scheduling of the closing is done when the relinquished property is allotted to the investor or buyer. In the cases when the investor’s personal finances paid earnest money deposit either for comfort or because the Agreement of Sale of the replacement property was signed before the closure and the exchange funds were available. The deposit can be refunded from the exchange funds at the acquisition of the replacement property. An Exchange Officer checks if the deposit was paid out-of-pocket and allows it to be reimbursed when closing the replacement property. The reimbursement cannot be paid directly to a buyer or an investor.