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1031 Exchange Requirements

Taxes on capital loss/gain may be unwarranted, if, for instance, one is qualified for the Delayed Exchange. Accordingly, there are several basic guidelines that place a transaction within §1031:

  1. The properties must be analogous - of "like-kind."Although this may seem like a predicament, the IRS is broadminded when evaluating "real property" transactions. Thus, as long as commercial property is exchanged, it will generally be deemed adequate to satisfy the "like-kind" clause. Moreover, office facilities and equipment must be exchanged for their equivalent.
  2. There must be a genuine replacement. A mere sale is unacceptable; it will take the entire transaction outside the boundaries of §1031.
  3. The property exchanged must be employed for commercial purposes: business and investment. The replacement property must be one that caters to the taxpayer's trade. Residential property does not apply to the Delayed Exchange (1031).
  4. Although 1031's main purpose is to benefit those involved in particular real estate transactions, the gratuity is restricted. An exchanger must act promptly because a lapse of time will invalidate the tax deferral. Pay close attention to the specified deadlines. The timing requirements are discussed within the three steps necessary to execute a Delayed Exchange.
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