Under Internal Revenue Code 1031, real estate investors may defer capital gains tax on real estate investment property when they reinvest in a like-kind property. This is also known as a 1031 exchange.

The criteria for a 1031 exchange are very specific and investors are strongly advised to consult with competent legal and/or tax advisors. Following is a synopsis of 1031 exchange rules:

Within 180 days of the transfer of the relinquished property or the due date of their tax return of the year in which they relinquish (unless an extension is filed) - whichever comes first - an exchanger must complete the exchange.

• On the 45th day following the relinquishment of the property, the exchanger must identify a replacement property that is consistent with Internal Revenue Service regulations.
• Exchanges have three options when identifying replacement properties according to Internal Revenue Service stipulations:
  1. The Three Property Rule allows for the investor to identify three properties of any value, one or more of which must be acquired within the 180-day acquisition period.
  2. The 200% of Fair Market Value Rule allows the investor to identify more than three potential replacement properties. The caveat for this rule is that the total fair market value of all the potential replacement properties identified does not exceed 200% of the sales price of the relinquished property (or properties).
  3. If the investor identifies replacement properties that exceed the Three Property Rule and the 200% of Fair Market Value Rule, the identification will still be considered for a 1031 exchange if the investor acquires at least 95% of the value of properties that were identified. This is referred to as the 95% Exception Rule. Keep in mind, however, that the investor must acquire at least 95% of the value of the properties identified or the entire gain may be subject to tax.

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