The “Like-Kind” Requirement

In order to qualify for safe harbor tax deferral, the Relinquished Property must be “like-kind” to the Replacement Property.  It is this “like-kind” definition that often confuses many taxpayers and their tax advisors.

In exchange transactions involving real property, all real property is deemed to be “like-kind” with other real property. Thus, as an example, a retail shopping center is “like-kind” to an office building while raw land is “like-kind” to an apartment building. Also qualifying as “like-kind” real property:

1. •Raw Land
   

2. •Office Buildings
   

3. •Retail Property
   

4. •Multi-family property
   

5. •Residential rental property
   

6. •Leases and Lease Options of 30+ years
   

7. •Options and Contracts
   

8. •Oil, Gas and Mineral Rights
   

9. •Tenants-in-Common (“TIC”) Interests
   

10. •Boat Slips/Docks
    (note that state law will control whether these are treated as personal property or real property)
    

In personal property exchanges, the “like-kind” requirement is much more restrictive and therefore more onerous for the taxpayer.  As an example, an aircraft is not “like-kind” to a bulldozer, and a car is not “like-kind” to a truck. If you sell a sports car, you must purchase a sports car as replacement property.

Property Identification Rules

There are three different rules that an exchanger can utilize when identifying property in a 1031 exchange:

1. The Three Property Rule: The Exchanger may identify up to three potential Replacement Properties without regard to their value.

    or

2. The 200% Rule: The Exchanger may identify more than three properties, provided that the aggregate fair market value of these properties does not exceed 200% of the value of the Relinquished Property.

    or

3. The 95% Rule: The Exchanger may identify more than three properties, without regard to their aggregate value, provided that the Exchanger acquires 95% of the fair market value of the identified properties.

Exchange Deadlines

There are two key deadlines that Exchanger’s must be aware of when completing a 1031 exchange. These 1031 deadlines are strictly enforced by the IRS, regardless of whether the date falls on a weekend or holiday.

45 Days: Exchangers have 45 days from the sale of the Relinquished Property to identify potential Replacement Property. There are three different rules that an Exchanger can follow when performing this identification. Once the 45 day deadline has passed, the Exchanger may not add, remove or substitute properties to this identification list.

180 Days: Taxpayers have 180 days from the sale of the Relinquished Property to close on, and take title to, properly identified Replacement Property or Properties. Note that the 180 day timeline is inclusive of, and not in addition to, the 45 day identification period. Should the taxpayer’s next tax reporting deadline occur prior to the 180th day, the taxpayer will need to complete the exchange by this earlier tax reporting deadline (April 15th for individual tax payers), or in the alternative, file an extension for their tax return to utilize the full 180 days.

As a general rule, the IRS does not offer extensions for either the 45-day identification deadline or the 180-day acquisition deadline. However, historical extensions to these deadlines have occurred under Presidential declarations of emergency, such as Hurricane Katrina and the terrorist attacks of September 11, 2001.

SEA 1031

Global Headquarters:

The Pinnacle Building

Fifth Floor

3455 Peachtree Street, NE

Atlanta, GA 30326

Toll Free: +1.888.800.1031

Main: +1.678.805.4492

Fax: +1.678.302.4428

www.sea1031.com

info@sea1031.com