The Rules of a 1031 Exchange

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The property being sold and the property being acquired must be of "like-kind," meaning they are both held for investment or productive use in a trade or business. The properties do not need to be identical but must be similar in nature or character. 

The proceeds from the sale of the original property must be handled by a qualified intermediary (QI) or exchange facilitator. The seller cannot take possession of the funds during the exchange process 

Within 45 days of selling the original property, the investor must identify potential replacement properties in writing. The identified properties must meet specific criteria, such as the "3-Property Rule" (up to three properties) or the "200% Rule" (total value does not exceed 200% of the sold property’s value). 

The investor has 180 days from the sale of the original property to close on the purchase of the replacement property. This period includes the 45-day identification period, so the entire exchange transaction must be completed within 180 days. 

To fully defer capital gains taxes, the replacement property must be of equal or greater value than the property sold. If the new property is of lesser value, the difference (known as "boot") will be subject to capital gains taxes. 

The title of the replacement property must be taken in the same name as the original property. If the original property was held by a partnership, corporation, or trust, the replacement property must also be held in that entity's name. 

The properties involved in the exchange must be held for investment or business purposes, not for personal use. Personal residences do not qualify for 1031 exchanges, though there are specific rules for vacation homes. 

Investors must report the 1031 exchange on IRS Form 8824 during the tax year the exchange is completed, providing details of the transaction and ensuring compliance with all rules