How to Know if You Qualify for a 1031 Exchange

Posted Mar 22, 2024

A woman drinking coffee trying to figure out if she qualifies for a 1031 exchange.

So you’ve done your research and made your decision: you want to take advantage of a 1031 exchange to defer taxes related to your real estate investment. So how exactly do you qualify for this tax strategy?

First, any investment property owner with a built-up gain (meaning the market value exceeds the property’s adjusted basis) is eligible to do a 1031 exchange. Most people think that qualifying for one is time consuming and complicated, but it’s more simple than you think.

Here’s the qualifying checklist:

  1. You own an investment property
  2. You are willing to sell/exchange your property for a like-kind property
  3. You are willing to follow the rules of a 1031 exchange

Let’s talk about #1. According to Internal Revenue Code Section 1031(a)(1) an “investment property” is: “property held for productive use in a trade or business or for investment.” This could be as small as a house, condo or duplex, or as large as an office building, apartment complex, shopping center, or industrial building. Even raw land and mineral royalty interests qualify; it’s all considered investment property.

Now, for #2: to qualify for a 1031 exchange you must be willing to exchange your property for another like-kind property. The term “like-kind” as it relates to real estate doesn’t mean the same property type or size property. It means the property (or properties) needs to be in the real-estate-investing realm. You can’t sell your office building under a 1031 exchange and use the proceeds to buy a plane. But you can purchase an apartment complex or even raw land.

And finally, #3: you must be willing to follow established IRS rules regarding tax-deferred exchanges. The IRS doesn’t have a long rulebook with endless hoops to jump through to complete an exchange. The most important rules are the strict 45/180-day guidelines; giving you 45 days to identify a property (or more than one) of equal or greater value, and 180 days from the day you sell your existing property to acquire the replacement property you’ve identified.

So before you start the exchange process, ask yourself these questions:

  • Do you own investment property?
  • Are you willing to exchange your property for a like-kind property?
  • Are you willing to plan ahead and follow IRS rules?

If you answered yes to all three of those questions, congratulations! You are one step closer to potentially deferring taxes and building up your net worth!

This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.

Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.

Costs associated with a 1031 transaction may impact investor's returns and may outweigh the tax benefits. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities.

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