A stock image showing a blank federal tax form 8824- the form for like-kind exchanges. There is a pen and a highlighter on top of the form, and a tablet and other documents in the background of the image.

What Is A 1031 Like-Kind Exchange?

Whenever you sell property used for investment or business purposes and you have a monetary gain, you generally have to pay taxes on the gain at the time of sale. IRC Section 1031 provides an exception and allows postponing of payment on the tax on the gain if you reinvest the proceeds in another business or investment property as part of a qualifying like-kind exchange. Gain deferred in a 1031 exchange is tax-deferred but not tax-free.

“Like-kind” does not mean same kind. If you are selling a ranch property and wish to do a 1031 exchange, you are not required to purchase a ranch property as a replacement property. Like-kind property is property of the same nature, character or class. Most real estate will be like-kind to other real estate. For example, real property that is improved with a residential rental homestead is like-kind to undeveloped land. However, property within the United States is not like-kind to property outside of the United States.

The exchange can include like-kind property exclusively or it can include like-kind property along with cash, liabilities, and property (ie. homesteads) that are not like-kind. However, if you receive cash, debt relief, or property that is not for business or investment use, you may trigger taxable gain in the year of the exchange brought about by the non like-kind property.

Owners of investment and business property may qualify for a 1031 exchange. Individuals, C Corporations, S Corporations, General and Limited Partnerships, LLCs (Limited Liability Companies), Trusts, and any other taxpaying entity may set up an exchange of business/investment property for property of like-kind.

Structures Of A 1031 Exchange

In the simplest of terms, a 1031 exchange is the exchange of a business or investment property for a business or investment property of a similar value. However, there are several different types of 1031 exchange, some more complicated than others.

A Deferred Exchange allows you to dispose of property and subsequently allows the sale or disposal of property, and the subsequent acquisition of one or more like-kind replacement properties. To qualify as a 1031, a deferred exchange must be distinguished from a case of the taxpayer selling one property and using the proceeds to buy another property, which is a taxable transaction. Rather, in a deferred exchange, the disposition of the relinquished property and the acquisition of the replacement property must be mutually dependent parts of an integrated transaction constituting an exchange of property.

A Reverse Exchange is somewhat more complex than a deferred exchange. A reverse exchange involves the acquisition of replacement property through an Exchange Accommodation Titleholder with whom it is parked for no more than 180 days. During this “Parking Period” the taxpayer disposes of their relinquished property to close the exchange.

For both Deferred and Reverse Exchanges, both the relinquished property you sell and the replacement property you buy must meet certain requirements. Both properties must be held for use in a trade/business or for investment. Property used primarily for personal use, like a primary residence or vacation home, does not qualify for like-kind exchanges.

Please Click Here For More Information On Reverse Exchanges

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Timelines For A 1031 Exchange

While a like-kind exchange does not have to be a simultaneous swap of properties, you must meet two time limits or the entirety of the capital gain will be taxable. These limits cannot be extended for any circumstances or hardship except in the case of presidentially declared disasters.

In a Deferred Exchange, the first time limit you have is 45 days from the date you sell the relinquished property. By the 45 day mark, you must identify potential replacement property. This identification must be in writing, signed by you, and delivered to those involved in the exchange, such as the seller of the replacement property and the Qualified Intermediary (TCEC). However, notice only to your attorney, real estate agent, accountant, or similar persons acting as your agent is not sufficient as identification of a replacement property.

The second deadline is that the replacement property must be received and the exchange completed no later than 180 days after the sale of the exchange property. This 180 day mark is 135 days after the 45 day identification deadline of the replacement property.

Day 0: Date of sale of the Relinquished Property

Day 45: Identification of the Replacement Property/Properties

Day 180: Replacement Property received and Exchange completed

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TCEC's Role In Your Exchange

As your Qualified Intermediary (QI) we facilitate the start to finish exchange process as follows:

First, we help evaluate whether the exchange has merit. This is a crucial first step, as every exchange is fact driven and the facts are critical in the determination as to whether there are obstacles or impediments that make the exchange viable or not.

Second, if the exchange is viable, we prepare the necessary transaction documents related to the sale of the property you are selling or “relinquishing” in the exchange.

Third, we set up a segregated, interest bearing “lock-box” exchange account for each exchange. Of critical importance to you is that we do not commingle funds, nor do we use a master depository account.

Fourth, we help distinguish items on a closing settlement statement that may require special handing, such as rent prorations, credits for security deposits, other prepayment items, released earnest money or option fees, any personal property and any cash “boot” items.

Fifth, at the closing of the property you are selling, we ensure that funds are directed from that sale to your segregated “lock-box” exchange account.

Sixth, we chronicle your exchange time lines and follow up with you to help you timely identify the properties you may want to trade into as your replacement properties. There are 3 different exchange rules that may be used to identify replacement property. Which rule you use will depend on facts involved in your exchange. We are available to help you determine which rule is the more suitable one for your use.

Seventh, we will prepare the necessary transaction documents related to the exchange part of purchase of the real property you timely identified as the potential property to purchased as “replacement” property in your exchange. Depending on your facts, there may be one or more replacement properties to be acquired in trade.

Eighth, when you direct us, we coordinate the preparation of wire transfers of your exchange funds when needed for the purchase of your replacement properties, including earnest money deposits and any qualifying expenses related to the purchase of the replacement property or properties you have timely selected.

Ninth, we help distinguish items on the replacement property closing settlement statement that may require special handing, such as rent prorations, credits for security deposits, other prepayment items, earnest money, option fees, any personal property.

Tenth, we provide monthly accountings of your 1031 exchange account.

Last, we provide you with a binder of the start to finish documents, including the exchange account ledger. This binder is what your accountant/CPA will need for the proper reporting of your IRC section 1031 exchange.

What We As Your QI Will Not Do:

We do not promote any property for investment or acquisition purposes. 

We do not commingle your funds with those of others. We do not and cannot withdraw funds from your exchange account for any reason without your express approval and active participation to unlock your exchange account for any withdrawal purposes.

We do not  accept referral fees from sponsors or sellers or brokers of real property. 

Such actions would compromise our independence and in our opinion impair the fiduciary relationship in which we serve.

What We May do for you as an Ancillary Service:

If you so request and if we consent in writing to so assist, we are allowed under proper circumstances to provide services that are ancillary to the tasks of selling property in an exchange or purchasing property in an exchange. This may, for exchange, include: 

(1) exchange planning; 

(2) assisting in drafting of sale or purchase agreements or special provisional addendum to the same to address IRC section 1031 issues; 

(3) handling seller carry back notes and related security instruments, 

(4) assisting in a determination of whether replacement property “qualifies” as such; 

(5) addressing particular concerns of a replacement property purchase involving a tenancy in common (TIC) or a Delaware Statutory Trust (DST); and 

(6) addressing mixed use primary residence/homesteads and investment properties.