A Qualified Intermediary is required by the IRS to successfully complete the exchange. To learn more read our Simple Guide to Choosing a 1031 Qualified Intermediary blog.
Can’t Touch the Cash
A Qualified Intermediary must hold the proceeds during the exchange. If you control the funds in any way, you may risk disqualifying the entire exchange.
The IRS states that the relinquished property (property being sold) and the replacement property (property being bought) must be like-kind. Generally speaking, any type of investment property type may qualify for an exchange, except your primary residence. To learn more read our What is Like-Kind Property in Real Estate? blog.
45-Day Identification Period
The IRS states that an exchanger has 45-days from the date they sell their property to identify potential replacement property(ies).
There are 3 sub rules that apply to identifying replacement properties:
- 3 property Rule
The 3 property rule is the most popular identification rule. It states that the exchanger may identify up to 3 potential replacement properties regardless of value.
- 200% Rule
The 200% rule states that the exchanger may identify more than 3 potential replacement properties as long as their combined value does not exceed 200% of the sale price of the relinquished property.
- 95% Rule
The 95% rule states that the exchanger may identify any number of properties with no reference to sale price of the relinquished property, provided you actually acquire and close on 95% of the value identified.
The buyer of the replacement property must be the same legal entity as the seller of the relinquished property.
In order to defer all capital gains tax, the price of the replacement property (ies) must equal or exceed the price of the relinquished property.
The mortgage amount on the Replacement Property(ies) must equal or exceed the mortgage paid off at sale of the Relinquished Property.
Must Report the Exchange
The exchanger must properly complete IRS form 8824 (“Like-Kind Exchanges”) and include it as part of their tax return in the year in which they sold their relinquished property.