Basic Requirements of Exchanges
Both Properties Must be “Like-Kind”
Like-kind means you must buy something similar to what you sell. For example, you will buy real property if you sell real property. Like-kind refers to the nature or character of the property, not its grade, quality, nor the way it has been improved. It is a very broad and liberal category, so virtually any type of investment or business use property qualifies. Likewise, properties can be exchanged anywhere within the United States, in one or more states. In addition, section 1031 allows you to “mix-and-match” properties. You can sell a duplex in Colorado and acquire raw land in California, or sell a parking garage in Florida and acquire a multi-unit apartment building in Oklahoma and a warehouse in Texas.
Like-kind properties include: rental properties (single family homes, duplexes, triplexes, apartment buildings and complexes, etc.), raw land, office buildings, shopping centers businesses, marinas, golf courses, leases of at least 30 years, including options, parking lots, farms, factories, trailer parks, storage facilities, retail stores, or an interest as a co-tenant. Like-kind properties do not include: stocks, bonds, notes, partnership interests, personal property, and certificates of trust.
Both Properties must be Held for Investment or Business Use
Your use of both the relinquished property and replacement property must be for investment or business use: each for a minimum or one to two years. Properties must not be used for personal use for more than 14 days per year or 10% of the actual number of days the property has been rented in a given year.
Proceeds from relinquished property and the acquisition of the replacement property must “flow through” the Intermediary to insure favorable “safe harbor” treatment of the taxpayer. By law, the qualified intermediary may not be the taxpayer or an agent of the taxpayer (e.g. realtor, attorney, tax advisor, banker, accountant, employee, etc.) or lineal descendant of the taxpayer. To complete the 1031 Exchange, the Exchanger may not have access to the sale proceeds from relinquished property but must allow the Qualified Intermediary to receive and disburse all funds.
The Proper Documentation Must be used in Order to Comply with 1031 Regulations
1031 Exchange Agreement between the Exchanger and the Intermediary. This is the most important document in the Exchange. It is the document in which the Exchanger gives the Intermediary the right to acquire the relinquished property from the Exchanger and convey it to the buyer. It also gives the Intermediary the right to acquire the replacement property from the seller and then convey it to the Exchanger.
1031 Exchange Amendment and Assignment for the Rollover of the Relinquished Property. Assigns the Exchanger’s rights in the Agreement of sale with the buyer to the Intermediary. Serves as written notification to the buyer of the relinquished property of Exchanger’s intent to effect a 1031 Exchange and also provides a hold harmless clause to assure the buyer that there are no additional liabilities or costs to him. If a 1031 Exchange Clause is inserted into the Agreement of Sale, this document is unnecessary.
1031 Exchange Amendment and Assignment for the Acquisition of the Identified Replacement Property. Assigns the Exchanger’s rights in the Agreement of Sale with the seller to the Intermediary. Serves as written notification to the seller of the replacement property of the Exchanger’s intent to effect a 1031 Exchange and also provides a hold harmless clause to assure the seller that there are not additional liabilities or cost to him. If a 1031 Exchange Clause is inserted into the Agreement of Sale, this document is unnecessary.