IRC Section 1031 Like-Kind Exchange For Real Estate Investing

Real estate investors should be somewhat familiar with the IRC Section 1031 like-kind exchange rules.  It is important to talk to your tax professional if you are considering selling investment property and getting (replacing it) with another property. The IRC Section 1031 rules allow favorable tax treatment when a like-kind exchange of certain assets occurs.  You are allowed to defer gains on the sale of an asset if it is replaced with like-kind property.  It is a tax deferral, not a tax free exchange.

This exchange must be done within prescribed time periods.  Basically, there are two time periods you must follow.  The first requires you to identify a replacement property within 45 days of disposing of the first property.  Identifying means a written agreement that should be delivered to the seller.  The second time element is the requirement that you must acquire the replacement property within 180 days of disposing of the initial investment property.  There is a bit of a catch to the 180 days.  It must be acquired within the 180 days or before you tax return for that year is due, whichever is less.

Depending on the way the exchange is done, your transaction may require a third party intermediary or facilitator. Per an IRS release,  “It cannot be someone that you have used within the past 2 years.  You cannot act as your own facilitator. In addition, your agent (including your real estate agent or broker, investment banker or broker, accountant, attorney, employee or anyone who has worked for you in those capacities within the previous two years) cannot act as your facilitator. ”

When you do qualify for the IRC Section 1031 like-kind exchange you must report that on your tax return using IRS Form 8824.

I am attaching a link to an IRS document which provides clarification and publications references pertaining to this issue.

https://www.irs.gov/uac/like-kind-exchanges-under-irc-code-section-1031

 

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