Question 1

How long do I have to identify replacement property?

Accepted Answer

You have 45 days after the sale of your relinquished property to identify your replacement property(ies). Identification must be unambiguous, using a legal description or physical address, in writing, dated, signed, and received by your QI within the 45 days. This deadline is strictly enforced with no option for extension.

Question 2

How long do I have to purchase replacement property?

Accepted Answer

You have 180 days after the sale of your relinquished property to purchase your replacement property(ies). This requirement is strictly enforced with no option for extension. Your replacement period could be shorter if your tax return due date falls before the 180 days expire, in that case, you should file an extension on your tax filing.

Question 3

What are the identification rules?

Accepted Answer

The IRS provides three rules: The 3-Property Rule (identify up to three properties), the 200% Rule (identify more than three properties as long as total fair market value doesn't exceed 200% of your relinquished property's sales price), and the 95% Rule (if you exceed the first two, you must purchase 95% in value of what was identified).

Question 4

What does 'like-kind' mean?

Accepted Answer

For real estate, all real estate is like-kind to other real estate. Examples include an apartment complex exchanged for a cell tower easement, an office building for farm land, or a rental home for water rights. The only real estate that generally does not qualify is a vacation home and personal primary residence.

Question 5

Do I have to purchase all identified properties?

Accepted Answer

No. You can purchase one or all of the properties you identified. Identifying more than one property provides more options to ensure you have a replacement property within the 180-day period.

Question 6

What is a Qualified Intermediary (QI)?

Accepted Answer

A Qualified Intermediary is an unrelated third party used to facilitate the 1031 exchange transaction. You cannot use your realtor, lawyer, accountant, or a related party as a QI.

Question 7

Can I exchange more than one property?

Accepted Answer

Yes. You can relinquish multiple properties for one replacement property, or exchange one relinquished property for multiple replacement properties. The key is that your replacement property(ies) should be equal or greater in value than your relinquished property(ies) to avoid taxable boot.

Question 8

Does the title name matter?

Accepted Answer

Yes. With few exceptions, the title to the replacement property must be in the same name or entity as the relinquished property was held.

Question 9

Can I refinance before or after an exchange?

Accepted Answer

While there is nothing in the Regulations specifically addressing this, it is considered bad practice to refinance in anticipation of entering an exchange. Refinancing after an exchange to pull equity out is generally considered proper.

Question 10

Can I use exchange funds for improvements?

Accepted Answer

Yes, as long as your exchange is structured properly. The best method is to have a Special Purpose Entity acquire title to the replacement property, complete the improvements, and then transfer the property to you through a build-to-suit or improvement exchange.

Question 11

What is a Reverse Exchange?

Accepted Answer

A reverse exchange is where the replacement property is purchased before the relinquished property is sold. These are more complex and your QI should be involved in all steps and planning to ensure compliance with IRC § 1031.

Question 12

Can individual LLC members do their own exchange?

Accepted Answer

The IRS Code does not allow individual members/partners to do their own exchange, only the entity can. However, with enough preplanning, a 'drop & swap' technique allows certain members to drop their interest and enter the exchange individually.

1031 Exchange FAQs

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