1031 exchange for investment property: 45 and 180 days

What qualifies?

Section 1031(a) says no gain or loss is recognized on the exchange of real property held for productive use in a trade or business or for investment, if it is exchanged solely for real property of like kind that will also be held for business or investment.

Three limits matter most to home buyers and sellers:

• Real property only. The IRS instructions for Form 8824 state that for 2018 and later years, like-kind treatment applies only to exchanges of real property held for business or investment, other than real property held primarily for sale. Cars, equipment and other personal property no longer qualify.
• Not your residence. The statute covers property held for business or investment. Your main home is a different case: gain on it is handled by the exclusion in capital gains on a home sale.
• Not inventory. Property held primarily for sale, such as homes a builder or flipper intends to resell, is excluded (1031(a)(2)).

What counts as real property?

The Form 8824 instructions rely on Treasury regulations (sections 1.1031(a)-1 and 1.1031(a)-3) for the definition of real property, and they discuss land, buildings, property affixed to real property, intangible property and stock separately. Read that section before you assume that a fixture, a lease or a business interest qualifies. A swap can also mix assets: the instructions give the example of a single piece of land, a vehicle and cash for a single piece of land and a vehicle, which is not a multi-asset exchange because section 1031 may apply only to the land-for-land part.

What are the 45-day and 180-day deadlines?

The statute treats property you receive as not like kind unless:

1. It is identified on or before the 45th day after you transfer the property you give up. The Form 8824 instructions say the identification must be in writing, signed, and sent to the person who must transfer the replacement property to you (other than a disqualified person) or to another person involved in the exchange.
2. It is received by the earlier of the 180th day after the transfer, or the due date, with extensions, of your tax return for the year of the transfer.

Both clocks start on the day you transfer the old property. The 180 days cannot run past your return due date (with extensions), so a sale late in the year may leave you less than 180 days.

The instructions add that if you use a qualified intermediary (QI) for a deferred exchange, the transfer and the receipt of like-kind property are treated as an exchange.

A worked example

You sell a rental building for $600,000 and your basis is $250,000. You buy a replacement building for $650,000, all of it like kind, within the deadlines, and receive no cash. Your realized gain is $350,000, and none of it is recognized in the exchange year. Form 8824 figures the deferred gain and the basis of the new property.

If part of the proceeds comes back as cash, or you receive property that is not like kind, Part III of Form 8824 figures the gain you must report in the current year.

What does the paperwork look like?

• Form 8824 reports each exchange of business or investment real property for real property of like kind, figures the gain deferred, and figures the basis of the property received.
• The 180-day limit is tied to the due date of your return for the year of the transfer, so plan the filing together with the closing dates.
• Related parties. If you swap with a related person and either of you disposes of the property within 2 years after the last transfer, the gain is recognized as of that disposition (26 U.S.C. 1031(f)). Form 8824 asks about related-party exchanges on Line 7.

Where states differ

The federal rules above are the same in every state. State income tax treatment, transfer taxes on each deed and the closing costs for each property are set locally, and a state may tax the gain differently, so check your state revenue agency. For how deed taxes and closing costs vary, see Texas closing costs and California transfer tax.