1031 exchanges are excellent tools for deferring capital gains taxes on the sale of real property, but they come with a variety of rules and regulations. In this article, we are going to talk about four of the most important rules to remember when conducting a 1031 exchange of real or personal property.
Rule 1 – Exchange Out of & Into Like-Kind Property
The like-kind property rule is perhaps the most important rule in any 1031 exchange. But what is “like-kind” property? When you’re dealing with real estate, like-kind has a very broad definition that includes basically all real estate (provided it’s held for the right purpose – more on that below). When you’re looking to exchange items of personal property, the like-kind definition gets a lot narrower.
Rule 2 – Hold Your Property for the Requisite Intent
Having the right intent or mindset is also important in a 1031 exchange. All of the property involved in the exchange needs to be held primarily for investment or business purposes, and not personal use. So your primary residence would be excluded from 1031 exchange treatment because of this rule.
Rule 3 – Finish Your Exchange within 180 Days
All 1031 exchanges (whether of personal property or real estate) need to be completed within 180 days after the sale of the relinquished property. The first 45 days of that time period are set aside for identification of the replacement properties into which you plan to exchange.
To figure out your 1031 deadlines, use our helpful calculator.
Rule 4 – Exchange Into Property of Equal or Greater Equity, Value, Debt
You also want to make sure that your replacement property is of equal or greater equity, value, and debt when compared to your relinquished property. This is also known as the “napkin test.”
- 1031 Hotline: If you have questions about 1031 exchange rules, feel free to call me at 612-643-1031.
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