The 1031  Compliance Rules

The 1031 Deadlines...45/180

Click on each "date" circle for explanation

  1. START
  2. 45
  3. 180
  4. TAXES
  1. Start Date
    FIRST CLOSING

    The Date on which you (the Taxpayer) first "Transfers the Property Relinquished in the Exchange" (the first closing of QI's sale to your BUYER) is the "Start Date" or, in a "Reverse Exchange", it is the date of the first closing of QI's purchase from your SELLER.

  2. "Identification" Deadline
    DAY 45

    The Replacement Properties must be IDENTIFIED on or before "45 Days after the Date on which the taxpayer Transfers the Property relinquished in the Exchange". The closing of QI's sale to your BUYER is the "Start Date".

  3. Completion Deadline
    DAY 180

    The Exchange must "be Completed" THE EARLIER OF "the day which is 180 days after the date on which the taxpayer transfers the property relinquished in the exchange, or...the due date (determined with regard to extension) for the transferor’s [tax] return...for the taxable year in which the transfer of the relinquished property occurs"

  4. Reporting Deadline
    DEADLINE FOR REPORTING EXCHANGE TO IRS

    You MUST file an IRS Form 8824 "On Time" in order to be In Compliance Legally and, to record the Exchange; Form 8824 also declares the "Taxable Boot" and transfers your Relinquished Property "Tax Basis" to the Replacement Property you have Received through the 1031 Exchange

TIMING RULES (45-180)


The "45-DAY" Rule

The Replacement Properties must be identified on or before "45 days after the Date
on which the taxpayer Transfers the Property relinquished in the Exchange".

The closing of QI's sale to your BUYER is the "Start Date".


The "180-DAY" Rule

The Exchange must "be Completed the earlier of "the day which is 180 days after the date on which the taxpayer transfers the property relinquished in the exchange, or...the due date (determined with regard to extension) for the transferor’s return of the tax imposed by this chapter for the taxable year in which the transfer of the relinquished property occurs"

 
(i.e., to be clear, that's 180 days from that start date, NOT 45 plus 180 days).



IDENTIFICATION RULES


Form of ID

The Replacement Property must be identified in writing to and received by the QI timely.


Number of Properties ID'd

The number of Replacement Properties you "identify " are subject to the following rules:


The "3 PROPERTY" Rule

If up to 3 Properties are identified, the Taxpayer may acquire any 1, 2 or all 3 of them, regardless of their value.


But...If MORE than 3 properties are Identified; then EITHER


The "200 %" Rule applies

The Taxpayer may acquire ANY number of them Provided their Value does NOT
exceed TWICE (i.e. 200%) of the Value of the Relinquished Property;

or, 


The "95 %" Rule applies

The Taxpayer may acquire ANY number of them provided their Aggregate Value
is at least 95% of the value of ALL Properties identified.


CONCLUSION - Consult your Tax Adviser


TAXABLE "BOOT" RULES

 

Exchanges of "Like-Kind" with "Like-Kind" property PLUS SOMETHING ELSE

An exchange of anything for "money" really is just a "sale" and gains on sales are taxable.

And gains on an exchange of real estate for real estate are ordinarily also taxable.

But a "qualified 1031 exchange" requires the exchange of a certain kind of real estate ("Like-Kind" property) for other Like-Kind property to "qualify" for "non-recognition of gain" by the IRS.

And a "qualified 1031 exchange" of Like-Kind property for other Like-Kind property PLUS "something else" might be called a "partial 1031".  In such a case the "something else" is called "BOOT" and gains from boot are taxable


What is Boot?

Boot is anything other than Like-Kind property given in exchange, paid or credited to seller in the sale of the Relinquished Property, or paid or credited to buyer in the purchase of the Replacement Property.

NON-like-kind property could be:

  • Real property that is NOT held primarily for business or investment purposes
  • Cash
  • Debt reduction
  • A promissory note
  • Non-allowed closing costs or expenses paid or credited to seller in the sale of the Relinquished Property or paid or credited to buyer in the purchase of the Replacement Property


What costs/expenses are Non-allowed?

If you take possession of any portion of the Relinquished Property sale proceeds BEFORE the COMPLETION of the exchange, the transaction would not "qualify" for 1031 treatment.  Even your possession of the Replacement Property before completion of the exchange would not be allowed. See Boot Blog



EXCHANGES WITH "RELATED PARTIES" RULES


Related Parties Swap with one another - 2-Year Holding Period Imposed

If related parties exchange with one-another the gains would qualify for non-recognition PROVIDED that neither disposes of what was received for 2-Years otherwise the exchange would be dis-qualified and both would owe taxes.

The exchange could still qualify under these exceptions

  1. If either party dies during the holding period
  2. If there is an Involuntary Conversion or
  3. If the Secretary (of the Treasury) is satisfied, "…that neither the exchange nor such disposition had as one of its principal purposes the avoidance of Federal income tax.” 


You Sell to Related Party but Buy from Unrelated Party

No holding period applies if you sell your Relinquished Property to a relative and buy its Replacement from an unrelated party.  But it is a safer practice if the related party holds for the two years.


You Buy from a Related Party (but sold to an Unrelated Party)

This case is PROBLEMATICAL because it results in properties having SHIFTING TAX BASES even if it was done unintentionally.


CONCLUSION - Consult your Tax Adviser in cases involving Related Parties