1031 Exchanges – Seller’s Knowledge

The following outlines the basic steps of a 1031 exchange (i.e. a delayed exchange) where an investor sells a property first and then purchases another property. There are different scenarios in which an exchange can work, for instance, a reverse exchange where an investor buys a property and then sells an existing property. For the purposes of this memo, we will focus on the delayed exchanges. As with any tax strategy, it is advised that you consult with your attorney and tax specialist/accountant.

Download the full Seller’s Guide to 1031 Exchanges now!

Some quick notes to keep in mind

The exchange must be between like-kind properties. All real property is considered like-kind with all other real property. For example, you can exchange a sale of land for the acquisition of an apartment building or vice versa. However, the real property purchased and sold must both be in the United States.

It is important to make sure all properties qualify for a 1031 exchange. The properties involved in the exchange cannot be used for personal use; however, vacation homes can qualify if they are held as rental properties for a specific amount of time. Overall, the properties must be viewed as business or investment properties.

Section 1031 does not apply to
exchanges of

  • Inventory or stock in trade
  • Stocks, bonds, or notes
  • Other securities or debt
  • Partnership interests
  • Certificates of trust
Lorem Ipsum add your text here
Lorem Ipsum add your text here
Lorem Ipsum add your text here
Lorem Ipsum add your text here
After you complete the exchange, to receive the tax-deferment, you or your accountant must complete and file Form 8824 with the IRS in the tax year in which the exchange occurred. Also, there may be special state reporting requirements that must also be filed.

Form 8824 asks for

  • Descriptions of the properties exchanged
  • Dates that properties were identified and transferred
  • Any relationship between the parties to the exchange
  • Value of the like-kind and other property received
  • Gain or loss on sale of other (non-like-kind) property given up
  • Cash received or paid; liabilities relieved or assumed
  • Adjusted basis of like-kind property given up; realized gain

For quick reference or to print and share,
download our free PDF with all the above information.