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Basic Requirements for Section 1031 Exchanges
- The property which you are selling (the "Relinquished Property") must be used in your trade/business or held for investment, and not for personal use.
- The property which you plan to purchase (the "Replacement Property") must also be used in your trade/business or held for investment, and not acquired for personal use.
- The Relinquished Property and the Replacement Property must not be inventory, or other property which is held primarily for resale in the ordinary course of business.
- In order for the exchange to be entirely tax-deferred you must not receive cash at the closing or any debt relief in the acquisition of your Replacement Property. Any cash or "unlike-kind" property received in the exchange is called "boot" and will be fully taxable, without regard to any basis which you may have in the Relinquished Property.
- In regard to real property, "like-kind property" is defined as land and anything which is permanently attached to the land. For example, a ranch can be exchanged for a motel, office building, or shopping center. The fair market value of the furniture in the office building you receive in not "like-kind", but rather is considered "boot" received. You will pay tax on the fair market value of the furniture received.
- The sales proceeds of the Relinquished Property must not be actually or constructively received by you before the purchase of the Replacement Property. The Intermediary must hold these funds.
- Furniture, equipment, and other personal property transferred with the Relinquished Property or the Replacement Property is not "like kind" to real property and may be treated as boot. If it is treated as boot, then you must pay tax on its value.
- Title to the Replacement Property must be taken by the owner of the Relinquished Property. For example, if John Smith relinquishes property in the exchange, then he must take title to the Replacement Property rather than his partnership, corporation, trust, or his son/daughter. The Replacement Property should not be transferred by John for at least one year following the exchange.
- Best Exchange, Inc. serves only as the Intermediary in your exchange transaction. You must rely on the advice and counsel of your own accountant and/or attorney for your individual situation regarding an exchange transaction.
- Your replacement property must be identified in writing and must meet the idenification guidelines for an exchange. This identification must be given to Best Exchange, Inc. WITHIN 45 DAYS FOLLOWING THE CLOSING FOR THE RELINQUISHED PROPERTY.
- The purchase of the replacement property must be completed WITHIN 180 DAYS FOLLOWING THE CLOSING FOR THE RELINQUISHED PROPERTY – THE LAW ALLOWS NO EXTENSIONS. Any property acquired needs to be included in the 45-day identification letter discussed in paragraph 10 above.
- Repairs or improvements made to the Replacement Property after you receive title do not count as part of the cost of the Replacement Property for exchange purposes. If extensive repairs or improvements are necessary, and if you need the cost reflected as the Replacement Property, then the Replacement Property must be initially deeded to the Intermediary until the repairs are completed. This situation MUST be discussed with Best Exchange, Inc. PRIOR to closing and will require additional exchange fees.
- You must report a tax-deferred exchange to the Internal Revenue Service using IRS Form 8824 (Like-Kind Exchanges), with your Federal income tax return for the year in which you seel the Relinquished Property. You must have acquired the Replacement Property before you can file this income tax return. Therefore, if you have not acquired your Replacement Property by the filing date for that tax year (April 15 for calendar year taxpayers), then you must apply for an extension to file for the tax year in which you sold the Relinquished Property.
Disclaimer: The information contained at this site is solely provided for information purposes and does not create a business or professional relationship. This web site is intended to provide basic information about I.R.C. Section 1031 tax-deferred exchanges and does not contain legal advice. Our attorney is licensed to practice law in Washington, while she may be able to assist with an exchange in other jurisdictions, you may still need to consult with an attorney licensed to practice law in your jurisdiction before making specific legal and tax decisions.
Send questions, comments or feedback about this site to
se@bestexchangeinc.com; call 1-888-932-1031; or FAX (206) 935-0307 .
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