Clark Wealth Strategies

Fiduciary 1031 Exchange Solutions

Basics of a 1031 Exchange

Section 1031 of the Internal Revenue Code allows an investor to defer the payment of capital gains and depreciation recapture taxes that may arise from the sale of investment real estate.  By using the proceeds of this sale to acquire “like-kind” real estate, taxes may be deferred, as long as the investor meets certain conditions and deadlines. 

“Like-Kind” Definition

The replacement property must be like-kind to the relinquished property. Generally, real estate held for business or investment purposes in the United States is considered “like-kind,” including commercial and residential property.

Timeline of an Exchange

Within 45 calendar days following the closing of the relinquished property, the exchanger must identify potential replacement property(ies).  Within 180 calendar days following the closing of the relinquished property, the replacement property(ies) must be purchased.

Typical 1031 Exchange Process

  1. Exchanger sells investment property, known as the relinquished property.
  2. Proceeds are escrowed with a Qualified Intermediary (QI) at close of sale.
  3. Exchanger identifies replacement property(ies) within 45 days of sale and notifies QI.
    • Identification of Replacement Property:
      1. 3 Property Rule – identify up to 3 properties without regard to fair market value.
      2. 200% Rule – identify 4 or more properties, if the total fair market value of all properties does not exceed 200% of the total fair market value of all Relinquished Properties.
  • 95% Rule – identify any number of properties as long as the Replacement Properties acquired amount to at least 95% of the fair market value of all identified properties.
  1. The QI transfers funds for purchase of replacement property(ies). Exchanger must close on replacement investment property(ies) within 180 days of the closing date of the relinquished property.