• Trade or business or for investment.exchanged to) to be “like-kind” and must be held for productive use in a Relinquished (property being sold) and Replacement (property being The IRS requires that real properties involved in an exchange –

• The definition of like-kind is very broad when it comes to real estate. Any real property located within the U.S. (50 states or the District of Columbia) is accepted as like-kind. Foreign real properties cannot be included in an exchange. Under a few special circumstances, real properties in U.S. territories such as those in the U.S. Virgin Islands, Guam, and Northern Mariana Islands can be included.

• An investor selling a single-family home used as a rental in California can exchange into an apartment building in Arizona. Likewise, an investor can exchange his warehouse in Arizona for a retail commercial building in New York.

• Properties used as primary residence or held as inventory or a “flip” do not qualify for an exchange.

• Title to the Replacement property must be taken the same way as it did with the Relinquished property.

• An exception can be made when an individual sells the Relinquished property and takes title to the Replacement property under a single-member LLC as a disregarded entity.

• The 45-Day Period – An investor has 45 days to identify the Replacement property from the sale of the Relinquished property. The clock starts ticking from the close of escrow (COE) date and ends by midnight of the 45th day.

• The 180-Day Period – the purchase of the Replacement property must be completed within 180 days from the COE date of the Relinquished property.

There are 3 options when it comes to identifying the Replacement property within the 45 days：

• The 3 Property Option

  • Up to 3 properties can be identified. There is no limit on the individual or combined value of these properties.

  • Not all properties identified have to be acquired, but the combined value of the Replacement properties that end up being acquired must be equal to or greater than the value of the Relinquished property.

• The 200% Value Option

  • There is no limit on the number of properties that can be identified. However, the combined value of the properties identified cannot
    exceed 200% of the value of the Relinquished property.

  • Not all properties identified have to be acquired, but the combined value of the Replacement properties that end up being acquired must be equal to or greater than the value of the Relinquished property.

• The 95% Value Option (rarely used)

  • There is no limit on the number of properties that can be identified. However, the combined value of the Replacement properties you end up acquiring must be equal to or greater than 95% of the value
    of all the properties you identified within the 45-day period.

• In order to defer the capital gain tax liability, the investor is prohibited from “actual” or “constructive” receipt of the sales proceeds from the Relinquished property.

• The investor’s rights to the proceeds must be assigned to a Qualified Intermediary, which restricts the investor’s access to and use of the funds until the exchange is completed.

• It is important to engage a Qualified Intermediary early in the game. The 1031 exchange must be structured prior to the close of escrow of the Relinquished property. Trying to structure the 1031 exchange after the close of escrow of the Relinquished property would deem the exchange invalid.

• In order to 100% defer the capital gain tax, all sales proceeds from the Relinquished property must be put into the 1031 exchange account; and all the funds must be re-invested into the Replacement property.

• Any part of the proceeds not put into the 1031 exchange account would be treated as “Boot” and subject to tax; any funds from the 1031 exchange
  account not being re-invested into the Replacement property would be treated as “Boot” and subject to tax.