What Must QUALIFY for a 1031 Exchange...

1. Must have a QUALIFIED EXCHANGE
2. Must have a QUALIFIED INTERMEDIARY
3. Must have QUALIFIED PROPERTIES
4. Must have QUALIFIED PROCEDURE
5. Must have QUALIFIED REPORTING

• Must have a QUALIFIED EXCHANGE

The benefit of a Section 1031 Exchange is the non-recognition of taxable gains on a Qualified Exchange. So, you will need an expertly crafted Exchange Agreement with, "Mutually Dependent Parts of an Integrated Transaction constituting an Exchange by a Qualified Intermediary" (also called a QI). That Agreement will be drafted by your QI (and not by you, your attorney or your real estate agent).

In the Agreement You exchange relinquished property (what you give up) for replacement property (what you receive) and assign to the QI your rights in your contract to sell to your BUYER and your contract to buy from your SELLER, then the QI sells the relinquished property to BUYER "on paper", and "parks" (in escrow in an exchange account) the net sale proceeds (you may not "touch" those funds). You deliver directly to the BUYER your deed.

Then, with those parked funds, the QI buys the replacement property from the SELLER "on paper" and SELLER delivers the deed directly to YOU to complete the exchange (the QI does not "touch" either property and is in neither chain of title).

Notice that the title to the property you receive must be registered in the SAME NAME (TIN or SSN) as what You gave up - otherwise the IRS could call it a taxable sale. 

• Must have a QUALIFIED INTERMEDIARY

An IRS release reads, "You can not act as your own Facilitator. In addition, your Real Estate Agent or Broker, Investment Banker,  Broker, Accountant, Attorney, Employee or anyone who has worked for you in those capacities within the previous two years, can NOT act as your Facilitator."

Your qualified intermediary holds the funds that you may not touch in a qualified exchange, so the QI must be independent—not “related” to you (as your agent, adviser, attorney or by blood). Otherwise, the IRS may say you had “constructive possession” of the funds held by "your agent" (i.e., you “touched” the money) and that disqualifies the exchange. That’s why your QI may not give you legal, tax or investment advice—you must use other advisors.

• Must have QUALIFIED PROPERTIES

Must be qualified "Like-Kind" Properties:  Both properties exchanged must be of Like-Kind, in the sense only that they are, "Real Property held primarily for Productive Use in a Trade or Business or for Investment".

They are disqualified as non-like-kind if they are held for personal use (like your principal residence or personal vacation home used more than 2-weeks per year). And dealer properties are disqualified (such properties are considered inventory and not held for business or investment purposes).

Properties of different types might by qualified as Like-Kind provided they are both being held primarily for trade, business, or investment, for example:

— a Rent house, Office Building, Retail Shop, Warehouse, Chemical Refinery, Apartment Complex, r, any type of Unimproved Land so used. And although they may be very dissimilar, the exchange of a Chicken Farm for a Train Station can qualify for a Like-Kind exchange.

Properties of the same type might by disqualified as Like-Kind provided they are not both being held primarily for trade, business, or investment, for example:

—a Rental House cannot be Like-Kind with your own Home because your principal residence cannot qualify. And although you may own two Identical Vacation Homes, if you use one personally more than two-weeks in a year, the IRS says it is your personal vacation home and it would be disqualified. 

Must be "Real Estate" to qualify:  And things like Timber or Mineral Rights are "real property" interests in real estate. But the following are not real estate, namely Stocks, Bonds, Cash, or your Interest in an Entity that may Own Real Estate like a REIT.

Must be United States Property to qualify:  Only property that is situated within U.S. and the US Virgin Islands is eligible.

Must be Properly Identified Properties to qualify:  You must properly identify both properties or the exchange will be disqualified.

Must be Timely Identified Properties to qualify, the 45-day Rule:  You must identify the replacement property timely, within 45-days of the date the intermediary sells the relinquished property (the closing date) or the exchange will be disqualified.  The ID Rules must be followed and if you timely identify 3 properties you may acquire any 1, 2 or all 3.

Must be Timely Acquired Properties to qualify, the 180-day Rule:  You must complete the exchange timely, within 180-days of the date the intermediary sells the relinquished property (the closing date) or the exchange will be disqualified. Note that the time starts running on the closing date of the relinquished property, not the date the replacement property was identified (i.e., not 180+45 days).

Related Parties Rules:  Exchangers must disclose to the IRS if any related parties were parties to any exchange.  There are special rules for such exchanges and an abusive shift of basis between related parties resulting in tax avoidance could disqualify the exchange.

• Must have QUALIFIED PROCEDURE

In order to Qualify, you must Work with an Experienced & Qualified Intermediary (QI) so as to Properly "facilitate" the Procedure because, you may NOT Control ANY of the Proceeds or Property given in Exchange before the Exchange is Completed.

For example, if a Check is Issued to You and even if you immediately endorse It over to your QI, your "constructive possession" may cause the 1031 Exchange to fail.

The IRS states the following:

"IT IS IMPORTANT TO KNOW THAT TAKING CONTROL OF CASH OR OTHER PROCEEDS BEFORE THE EXCHANGE IS COMPLETE MAY DISQUALIFY THE ENTIRE TRANSACTION FROM QUALIFYING AS A 'LIKE-KIND' EXCHANGE TREATMENT, AND, MAKE ALL GAIN IMMEDIATELY TAXABLE. 

IF CASH OR OTHER PROCEEDS THAT ARE NOT 'LIKE-KIND' PROPERTY ARE RECEIVED AT THE CONCLUSION OF THE EXCHANGE, THE TRANSACTION WILL STILL QUALIFY AS A 'LIKE-KIND' EXCHANGE. GAINS MAY BE TAXABLE, BUT ONLY TO THE EXTENT OF THE PROCEEDS THAT ARE NOT 'LIKE-KIND' PROPERTY."

So, the best way to AVOID Premature Receipt of Cash, or other Proceeds is to use a Qualified Intermediary such as The 1031 Exhange Center to Park (hold in escrow) any and all Proceeds UNTIL the Exchange is totally Completed.

• Must have QUALIIED REPORTING

IMPORTANT:  You MUST file an IRS Form 8824 "On Time" in order to be In Legal Compliance and to register the exchange with the IRS.  Form 8824 also declares the Taxable Boot you may have received, and properly transfers your Tax Basis from your Relinquished Property to the Replacement Property.

When You

Meet all of the 5 Essential Qualifications

You may rest easy because you can and will receive what the IRS calls

"Safe Harbor"

and be assured of the significant and powerful...

• Cash Flow Benefits

• Tax Benefits &

• Estate Planning Benefits

that comes with a Properly Facilitated 1031 Exchange done by

The 1031 Exchange Center, IRS Qualified Intermediary