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1031 Exchange in a Nutshell

A 1031 exchange is a tax-deferred like-kind exchange that usually involves real estate but can also be done with boats, collectibles and livestock. The exchange must occur within 180 days from the date of relinquishing the first asset with the new potential asset being identified no later than 45 days from the relinquishing. Like-kind does not need to be the same quality, just the same nature and character. So a personal home cannot be exchanged for a rental property nor can livestock of different sexes be exchanged. But a rental home worth much less than another rental home can be exchanged with losses not being acknowledged. If the assets are not deemed the same type of property, tax consequences will result. Considering a 1031 exchange requires understanding like assets and how they qualify in an exchange.

Review the asset being sold and make sure it qualifies. Example of assets that qualify are real estate, boats and farm animals. Examples of assets that don't qualify are stocks, bonds and commodities. Most exchanges are real estate such as, apartment buildings, motels, rentals, farm land.

Determine if the qualified assets being exchanged are "like-kind." This means they must have the same nature or character but may differ in quality. Generally, property held as investment, such as a rental can be exchanged for another investment property such as TIC* property or commercial rental. A bull does not have the same nature or quality as a cow and they are not like-kind assets. See the IRS page for exact determinations of like-kind assets.

An exchange needs to be processed through a third party such as a qualified intermediary. Cash proceeds must not filter through the owner or agent. The qualified intermediary must be a neutral third party such as a registered QI company, escrow company, CPA and not related in person or business to the individuals conducting the exchange.

File any taxes on any cash proceeds in excess of the exchange value. If the asset sold is valued higher than the asset acquired, this is a capital gain. If a capital loss exists in a 1031 exchange, it is not recognized by the IRS and is not credited on tax returns.

*TIC - Tenant in Common

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