A tax free like-kind exchange contains the following basis elements that must be strictly followed in order to insure tax free exchange of real property:
- Real Property Only. Since January 1, 2018, tax deferred like-kind exchanges are limited to only real property, not personal property.[1]
- Qualifying Property. Both the relinquished property and the replacement property must be held for productive use in a trade or business or for investment.[2] This is known as the “Held for” requirement.
- Personal Residence. Property used solely for a personal residence does not qualify.[3]
- Deferred Exchanges. A deferred like-kind exchange permits the property owner to sell the property first and purchase the replacement property later. Deadlines to accomplish the exchange are as follows:
- Replacement property must be identified within 45 days after the taxpayer transfers the relinquished property, and
- Replacement property must be received within the earlier of 180 days of transfer or due date of tax return.[4]
- The replacement property must be unambiguously identified in a written instrument delivered to another party involved in the exchange.[5]
- Taxpayer may identify up to three replacement properties or any number of properties as long as their value does not exceed 200 percent of the relinquished property.
- Receipt of Boot. If the taxpayer receives “boot” in the form of cash or nonqualified property, the taxpayer recognizes taxable income to the extent of the boot.[6]
- Reverse Exchanges. The taxpayer may receive the replacement property before transferring the relinquished property. The replacement property is held by an exchange accommodation title holder. The relinquished property must be identified within 45 days and the exchange must be completed within 180 days.[7]
- Related Persons. For tax-free exchanges with related persons, if the related person or taxpayer disposes of the property received in the exchange within two years, the taxpayer must recognize gain. [8]
These terms relating to Section 1031 like-kind exchanges are not intended to be compressive. Please consult with a tax professional before moving ahead with a like-kind exchange.
Jared M. Le Fevre is a Partner in the Tax, Trusts and Estates Practice Group of Crowley Fleck PLLP. Mr. Le Fevre represents taxpayers before the IRS, IRS Independent Office of Appeals, Tax Court, Federal District Court and state tax agencies throughout Montana, Wyoming, North Dakota, Idaho, and Utah. Mr. Le Fevre is involved in federal and state and local tax audits, appeals, and tax resolution throughout these western states. Mr. Le Fevre also advises clients on the tax effects of business and real estate transactions.
[1] IRC § 1031(a)(2).
[2] IRC § 1031(a)(1).
[3]“Property used solely as a personal residence can’t satisfy the “held for investment” requirement. Federal Tax Coordinator Analysis (RIA).¶ I-3083.
[4] IRC § 1031(a)(4).
[5] Tres. Reg. 1.1031(k)-1.
[6] IRC § 1031(b).
[7] Rev. Proc. 2000-37.
[8] IRC § 1031(f).