Rules & Regulations

Summary for the rules and regulations for all 1031 exchanges:

• The Five Day Rule: In a reverse 1031, the exchanger and the EAT must enter into a “Qualified Exchange Accommodation Agreement” within 5 business days of the EAT taking title.
• The 45-Day Rule: An investor has 45 days from the sale of the relinquished property to identify a replacement property.  The IRS has several stipulations as to how many and what type of properties can be chosen.
• The Three Property Rule: Any 3 properties, no matter the market value can be identified as replacement properties, as long as one of them ends up being the replacement property.
• The 200% Rule: As long as the total value isn’t more than 200% of the total value of the relinquished property at closing, any number of properties can be identified.
• Property Limits: Rehab and resell properties are not classified as investment properties by the IRS.  Nor are primary residences, foreign properties, or land under development for resale.
• Qualified Intermediaries: The IRS has strict rules on who can and cannot serve as a qualified intermediaries or accommodators.  Generally, there are companies that specialize in 1031 escrow accounts.
• Escrow: Funds from the sale of the relinquished property must be held in escrow for the purchase of the replacement property.
• Depreciation: When using a 1031 exchange, the adjusted basis from the relinquished property is transferred to the replacement property, and the depreciation schedule from the relinquished property applies if the replacement property is of equal or lesser value.
• Tax-deferral limits: Only the purchase amount of the replacement property is tax deferrable.  Any net gain is considered boot and taxable.  Therefore, always advise an investor interested in a 1031 exchange to purchase a replacement property equal to or greater than the value of the property sold.