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How 1031 Tax Deferred Exchanges Work

Under 1031, all real property (as it is defined by state law) is considered "like-kind" with other real property of the same nature and quality. The following are examples of qualified "like-kind" real property exchanges:

  • Raw land for rental property
  • Single family rental for multi-family rental
  • Retail space for motel/hotel
  • Farms/ranch for golf course
  • 30-year leasehold interest for fee simple interest
  • Non-income producing raw land for income-producing rental property

The use of a qualified intermediary is the most common method used to complete a valid tax-deferred exchange quickly and easily. As a qualified intermediary, Wachovia Exchange Services, Inc. (WES) typically holds funds during the course of deferred exchanges. There are several steps involved in a 1031 transaction of real property:

  • The taxpayer signs a contract to sell the relinquished property to the buyer.
  • Prior to the property closing, the taxpayer retains WES to be the qualified intermediary.
  • At the closing of the relinquished property, the exchange funds are wired or a check is sent to WES.
  • Within 45 days after the transfer of the relinquished property, the taxpayer completes the Identification of Replacement Property exhibit and returns it to WES (if the taxpayer does not acquire all replacement property within the first 45 days).
  • The taxpayer has a maximum of 180 days in the exchange period (or until the tax filing deadline, including extensions, for the year of the sale of the relinquished property), to acquire any and all replacement properties.
  • At the closing of the replacement property, WES wires the exchange funds or a check is sent to complete the exchange.

Rules & Timelines

Basic Exchange Rules

  • Both relinquished and replacement property must be "held for productive use in a trade or business or held for investment" and property must be "like-kind." All real property is like-kind.
  • The purchase price of the replacement property must be equal to or greater than the net sales price of the relinquished property.
  • All cash or other proceeds received from the sale of the relinquished property must be used to acquire the replacement property.

Exchange Timelines

An Investor has 180 days to complete their exchange after the transfer of the relinquished property, or the due date of their tax return for the year in which they relinquish their property (unless an extension is filed), whichever occurs first. By the 45th day replacement property MUST be identified in a manner consistent with the IRS regulations.

For more information about 1031 exchanges, contact Wachovia Exchange Services at (703) 801-4178.

You may also wish to review the risks of TIC investments.