I find that many clients and potential clients in the real estate industry in Houston, along with others who have exchanged real estate in the past year, ask me whether or not their transaction is eligible for a 1031 exchange. The primary 1031 exchange rules and requirements are: 1) same taxpayer: the taxpayer who sells is the taxpayer who buys, 2) property identification within 45 calendar days of the closing sale of the first property, 3) purchase of the replacement property within 180 calendar days, 4) trading up: the price of the replacement property is equal to or greater than the old or relinquished property, 5) hold time supports the intent to hold for investment, and 6) related party transaction regulations.
In summary, the 1031 exchange has to be pre-arranged before the first property is sold. Next, the proceeds from sale must go into a pre-arranged escrow account to be held by a 1031 exchange provider; another words, you are not allowed to personally take possession of the cash during the exchange period. Within 45 days of selling the original property, at least 3 properties must identified as potential replacement properties to your 1031 escrow provider, and the closing on one of the identified replacement properties must take place within 180 days of the sale of the original property. Further, the price of the replacement property has to be equal to or greater than the sale price of the original property. At that time, the funds held in escrow by the 1031 exchange provider will go towards the purchase of the replacement property at closing. In the short, the entire transaction is monitored by the 1031 exchange provider to make sure it qualifies as a 1031 exchange for income tax purposes.
The final 2 issues to consider are: 1) Holding Period, and 2) Is this a related party transaction? Regarding holding period, there is nothing specific in the tax code other that the property needs to be intended as long-term investment property. Another words, the IRS can nix the transaction if the property is immediately resold and/or it appears that the replacement property is being used for personal use and not as an investment property. To elaborate on this point, the investment purpose of the replacement property needs to be the same, for all practical purposes, as the investment purposes of the original property. For example, if the original property were a rental house, then the replacement property would need to be rental property as well. The related party issue has to with selling or buying the property from a family member or relative. Also, buying or selling to/from a company that is owned by a related party, even only a small percentage owned by the related party, can be problematic. Same goes for buying from or selling to an estate or trust where there is a related party in the mix, so to speak, can be problematic as well.
The following real and personal property are eligible for 1031 consideration:
- Build on land already owned
- Businesses
- Farms
- Shopping malls and strip centers
- Golf courses and practice ranges
- Trailer parks
- Self-storage facilities
- Oil, gas and mineral interests
- Water and ditch rights
- Parking lots
- Condominiums
- Improvements/Build to Suit
- Build on land already owned
- Gold, silver and numismatic coins
- Convenience stores
- Land
- Commercial buildings, warehouses
- Gas stations
- Apartments
- Hotels and Motels
- Leasing portfolios with cars, trucks and equipment
- Hospital equipment
- Artwork
- Rental properties
- Collectibles – rugs, antiques, cars, coins, stamps, metals, gems
- Conservation easements
- Timberland
- Communication towers
- Aircraft
- Livestock
The following real and personal property are not eligible for 1031 consideration:
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