Requirements for a Seller to Engage in a 1031 Exchange

 Requirements for a Seller to Engage in a 1031 Exchange

1. Property Qualification: Both the relinquished property (sale) and replacement property (purchase) must be held for productive use in a trade or business or for investment purposes. Primary use, principal residences, and inventory property do not qualify for 1031 treatment.
   

2. Like-Kind Property: The replacement property must be of like-kind to the relinquished property. For real estate, this means any real property held for investment or business purposes can be exchanged for any other real property held for similar purposes. The following classes are considered like-kind real property: Land, Single Family Home, Duplex, Multi-Unit, Apartment Building, Commercial, Industrial, Retail, DST, etc.
   

3. Use of a Qualified Intermediary: To ensure compliance with 1031 exchange rules, a seller must use a facilitator also known as a Qualified Intermediary like CR Capital 1031 to facilitate the exchange.
   

4. Timing Rules: The replacement property must be identified within 45 days of the sale of the relinquished property, and the exchange must be completed within 180 days.
   

5. Same Taxpayer Requirement:  In a 1031 exchange, the taxpayer who owns the relinquished property must be the same taxpayer who takes ownership of the replacement property.
   

6. No Cash or Boot: To fully defer capital gains taxes, an exchanger must purchase replacement property that is equal or greater than their Net Sale Value (NSV) and reinvest all proceeds from the sale into the replacement property. Any cash or non-like-kind property received (known as “boot”) will be subject to taxation. If an exchanger purchases property under their NSV, the difference in their values becomes the new taxable gain.

Example of a Seller Completing a Fully Tax Deferred Exchange

Let’s say ABC, LLC owns a commercial building valued at $500,000, which has held for investment purposes. ABC, LLC decides to sell this building and acquire a larger office complex valued at $700,000 to expand its operations.

1. Engage CR Capital 1031 as the Qualified Intermediary (QI): ABC, LLC contacts us at CR Capital 1031 to act as the QI for the exchange. We will work with your escrow officer to handle the sale of the relinquished property and the purchase of the replacement property.

2. Sale of the Relinquished Property: ABC, LLC sells the commercial building for $500,000. The proceeds from the sale are transferred to us, the QI, to hold until the replacement property is acquired.

3. Identification of Replacement Property: Within 45 days, ABC, LLC identifies the office complex as the replacement property.

4. Acquisition of Replacement Property: Within 180 days, ABC, LLC uses the $500,000 held by us, the QI, and an additional $200,000 from its own funds to purchase the office complex.

5. Completion of the Exchange: By purchasing equal or greater in value and reinvesting the entire $500,000 from the sale of the relinquished property into the replacement property, ABC, LLC defers the recognition of capital gains taxes on the transaction.