What Are the Guidelines for 1031 Exchanges?

Exchanges under Internal Revenue Code Section 1031, also known as like-kind exchanges, must involve business or investment property to qualify for a tax deferment, reports the IRS. Like-kind exchanges of unequal value may involve taxable gain. The IRS has specific timelines for the completion of 1031 exchanges.

Exchanged property must be similar in character, nature or class to qualify as like-kind, according to the IRS. The rules for similarity are liberal, explains Forbes. For instance, taxpayers can exchange real estate, such as an apartment building with a piece of vacant land. However, commercial property and personal property cannot be like-kind, nor can property within the United States and property outside the United States, as the IRS points out. Some types of property that are not eligible for 1031 exchanges include inventory, stocks and bonds, securities and debt, certificates of trust, and partnership interests.

Although 1031 exchanges must be part of an integrated transaction rather than separate property purchases, taxpayers may defer the exchanges within time limits, reports the IRS. A taxpayer has 45 days after selling the relinquished property to provide a written legal description of the replacement property. The taxpayer must receive the replacement property to complete the exchange no more than 180 days after selling the relinquished property. To avoid taking premature control of the proceeds before the transaction is complete, taxpayers usually employ qualified intermediaries to handle deferred 1031 exchanges.