A successful Section 1031 Exchange requires that you meet all of the IRS tax code requirements to remain eligible to defer your capital gains when selling the investment property.  Here are some of the IRC's key provisions:

The identification period begins on the day the Exchanger sells the Relinquished Property and ends 45 days after. If the Exchanger does not identify the Replacement Property before the end of the identification period, the entire section 1031exchange will fail. In order to be property identified, Replacement Property must be designated as Replacement Property in a written document signed by the Exchanger. This written document must be hand-delivered, mailed, telecopied, or otherwise sent out before the end of the 45-day identification period to the other person involved in the exchange.  The Replacement Property must be unambiguously described in the written document or agreement. It must be described by its legal description or street address.

The exchange period begins on the day an Exchanger transfers the Relinquished Property and ends on or before 180 days after. All property involved in a Section 1031 Exchange must be transferred on or before 180 days.  If the due date for the current year’s tax return falls before the 180 days transpire, the property must be exchanged by the tax return due date. During this period, the Exchanger must pay for and receive the Replacement Property.

When an Exchanger completes a §1031 Exchange, he must file IRS Form 8824. If the exchange involves business property, Form 4797 must be filed in conjunction with Form 8824. If the exchange involves investment property, Schedule D of Form 1040 must be filed in conjunction with Form 8824.

Incidental property is property typically included in the sale of the property. This property could be furniture, laundry machines, appliances, and more, and should not be treated as separate property from the real estate if it follows certain guidelines.

 

 Taxable Gain

In order to figure out the taxable gain on a property, determine the fair market value of the boot (money and unlike property) received. Then figure out how much the gain would have been if the Exchanger had sold the property as a regular taxable sale. The taxable gain is the smaller of the two amounts.

 

All proceeds from the sale of the Replacement Property must be reinvested in the purchase of the Replacement Property. Therefore, the Replacement Property must be worth the same amount or more than the Replacement Property. If the Replacement Property is worth less than the Replacement Property, the remaining funds from the Replacement Property are taxable.

Replacement Properties can be used as rental properties. If this is the case, the Exchanger must show intent to use the property as such. An example of showing intent in this case would be to put the property as a rental on two or more consecutive tax returns.

Multiple Relinquished Properties can be combined for a Like-Kind Exchanges with one or more Replacement Properties. However, if the Relinquished Properties are transferred on different dates, the effective date for the 45-day identification period and the 180-day exchange period is the date of the earliest-purchased property.

Related Parties

If parties involved in a Like-Kind or Reverse Exchange are related, special rules sometimes apply.

Financial transactions between spouses do not warrant income tax consequences.

Most transfers during a divorce are tax free. However, unless a transfer qualifies for nonrecognition under the provisions of §1030, it is normally subject to tax.  If an Exchanger transfers property to or from a related person, does not recognize gain or loss, and disposes of the property before two full years after the transfer, then gain or loss must be recognized from the property.

If one of the parties involved in the transfer is a nonresident alien, then gain or loss must be recognized on a property exchange between spouses (or former spouses).

If a gain or loss is not recognized from a transfer of property to a related party, the property is treated as a gift and is not considered a sale or a Section 1031 Exchange.