1031 Exchange Requirements 

In case a person or a business is interested in availing the benefits of tax deferral specified in section 1031 of IRS (Internal Revenue Service) tax book he has to scrupulously follow the 1031 exchange requirements given in this tax book. The rules in this section help the investor in investing more and do not discourage his investment. However, it discourages investors who avoid paying taxes. Since the process involves a large amount of legal complications it is worthwhile to entrust it to a professional in that field who understands the nuances of this law well.

The first of these 1031 exchange rules defines 1031 property exchange. 1031 exchange rules (1) (a) defines the basic requirement for the 1031 property exchange and specifies that no loss or gain shall be recognized in the exchange of like-kind property. This means that you cannot buy a replacement property at a lesser price than the sale amount of original property thereby resulting in a profit to the seller. However, the property purchased can be of higher value than the sale value as long as the buyer can tie up his additional funds requirement.

The second rule talks about the term like-kind of the 1031 exchange program. This rule stipulates that the exchange as defined in this law of two properties can be done only if the properties are similar in nature. However, they need not necessarily of the same value. For example, exchange transaction of cattle and building are not permissible and in such a transaction one is destined to pay tax on the property sold. In contrary, one can purchase a mall using the sale proceeds of a building and since these are of similar type they are eligible for tax deferment.

1031 exchange rules also have specified timeframe for transactions coming under this umbrella. Although these restrictions do not come into picture at the time of initial exchange one should be aware that for a valid exchange the whole process of transactions has to be completed within 45 days of selling the property. In case the person requires more time for completing the deal, he should give a short list of properties he is interested in to the qualified intermediary on the 45th day. The finalization of the deal has to be done before 180th day and the party with whom the exchange is finalized should be one of those in the list given to the intermediary. Otherwise he has to pay tax on the sale amount.

Although the 1031 exchange requirements appear to be difficult to manage, there should not pose any serious problem once you understand the dos and don’ts of this rule. As per this rule, neither the purchaser nor the seller has the authority to handle money and have to be deposited with the qualified intermediary. In emergency situations, these intermediaries also protect the persons using safe-harbor laws. Further, since these people are qualified in the field they follow rules diligently thereby preventing any audit queries.