Most 1031 exchange transactions are structured as forward-delayed exchanges, where the taxpayer sells their relinquished property, and then acquires their replacement property within 180 days. But there are times when the taxpayer must acquire their replacement property before the relinquished property sells. This is possible through a process that is known as a Reverse Exchange.

One of the most common questions asked is whether or a not a vacation property qualifies for a 1031 exchange. There are three basic rules for including a vacation home in a 1031 exchange that were introduced by the IRS in 2008.

It is important to note that any credits on the settlement statement directly paid out to the taxpayer may also result in boot and a taxable event. If certain situations are not handled properly in the construction and administration of the 1031 exchange it can result in credits on the settlement statement. Here are couple common situations:

The foundation of all successful 1031 exchanges is laid by the qualified intermediary. Do your due diligence in researching qualified intermediaries to ensure you are not only getting the best service possible, but to ensure your deferred capital gains tax will hold up above IRS review.

Have you already sold your property and received the proceeds? If yes, then you no longer qualify for a 1031 exchange because you already received the gain which is now taxable. From the close of the sale on your property, will you be able to identify a potential replacement property within 45 days?

All 1031 exchange have a 180-day time limit starting from the day of the close on the sale of the Relinquished Property. If the taxpayer has not completed the purchase of the Replacement Property before or on day 180, then the exchange is closed

A 1031 exchange, also known as a like-kind exchange or tax deferred exchange, is where real property that is “held for productive use in a trade or business or investment” is sold and the proceeds from the sale are reinvested into a like-kind property intended for business or investment use, allowing the taxpayer, or seller, to defer the capital gains tax and depreciation recapture on the transaction. The property sold as part of a 1031 exchange is the Relinquished Property. The property purchased is the Replacement Property. The real property in a 1031 exchange must be like kind; most real estate is like-kind to all other real estate. For example, an office building could be exchanged for a rental duplex, a retail shopping center could be exchanged for farmland, etc. During a 1031 exchange, neither the taxpayer, nor an agent of the taxpayer, can receive or control the funds from the sale of the property. If a taxpayer has direct or indirect access to the funds, a 1031 exchange is no longer valid. A qualified intermediary is used to hold the proceeds of the Relinquished Property sale until it is time to transfer those proceeds for the close of the Replacement property. To be eligible for a 1031 exchange the person or entity must be a US tax paying identity. This includes individuals, partnerships, S-corporations, C-corporations, LLCs, and trusts. However, it is a requirement that the same taxpayer sells the relinquished property and purchases the replacement property for a valid exchange. 1031 exchanges were first authorized in 1921 because Congress saw the importance of people reinvesting in business assets and they wanted to encourage more of it. There have been changes and additions to the regulations that govern 1031 exchanges, and the most recent changes impacting real estate in a 1031 exchange were in 2001.

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