A brief overview of the Section 1031 exchange rules:

1.  The exchange must involve “like-kind” properties. All properties must be held for a productive purpose in business or trade, as an investment.

2. Within 45 days from the day of selling the relinquished property, one or more replacement properties must be selected. In the case of multiple properties, one of the following rules must be satisfied:

• Three Property Rule – Up to three properties are selected regardless of market value. Not all of them have to be purchased.

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• 200% Rule – Any number of properties are selected as long as the aggregate Fair Market Value (FMV) of all replacement properties does not exceed 200% of the aggregate FMV of all of the relinquished properties as of the initial transfer date. Not all of the selected properties have to be purchased.

• 95% Rule – Any number of properties are selected as long as 95% of the aggregate FMV of the selected properties is purchased.

3. The identified replacement property must be acquired by the taxpayer within 180 days.

4. At the close of the relinquished property sale, the proceeds are sent to an intermediary, who holds the funds until the transaction for the replacement property is ready to close.

5. If the investor is trading down, the resulting “boot” –  in the form of net cash received, debt reduction, excess borrowing to finance the replacement property or sale proceeds being applied toward non-transaction costs at closing – may be subject to taxation.

Last Updated on March 30, 2012 by Ramin Seddiq