Yes, the following additional rules apply to §1031 Exchange transactions:
THE LIKE-KIND PROPERTY RULE
Properties exchanged must be of “Like Kind.” Real property cannot be exchanged for a different kind of investment such as an airplane.
THE EQUAL OR GREATER VALUE RULE
In order to defer all capital gains tax, the Replacement Property should be of equal to or greater value than the Relinquished Property.
USE ALL PROCEEDS FROM THE SALE RULE
The owner/seller should use all of the proceeds from the sale of the Relinquished Property to acquire the Replacement Property in the §1031 Exchange.
THE EQUAL OR GREATER DEBT AND VALUE RULE
Generally, the debt, or mortgage, on the Replacement Property should equal or be greater than the debt on and the value of the Relinquished Property. However, the person doing the §1031 Exchange can opt to carry less debt on a Replacement Property if cash is added from other sources (e.g., personal savings.) All the cash must be used in the purchase and all the debt must be rolled over.
THE SAME OWNER RULE
The person who sells the Relinquished Property must be the same person who acquires the Replacement Property.
THE TIMING RULES
To make a valid exchange, the Exchanger must:
1. Identify the Replacement Property within 45 days of the sale of the Relinquished Property, and
2. Complete the entire exchange process by the earlier of either:
- the date the tax return is due, or
- 180 days after the sale of the Relinquished Property.
If the tax return is due before the 180-day period is over, the exchange period can be extended by filing for an extension of the tax due date.
THE IDENTIFICATION RULE
The Exchanger must submit a signed, written statement to an unrelated third party – such as the Qualified Intermediary – identifying potential replacement properties no later than 45 days after closing on the Relinquished Property. The Replacement Property must satisfy one of the following rules:
1. The Three Property Rule: Identify three properties regardless of their market value.
2. The 200% Rule: Identify any number of properties as long as their combined fair market value does not exceed 200% of the fair market value of all relinquished properties.
3. The 95% Rule: Identify any number of properties, no matter what the aggregate fair market value, provided that 95% of the value of the identified properties are acquired.
THE NAPKIN RULE
If the Exchanger purchases a property of lesser value, he/she will be responsible for any tax on the difference. The Exchanger must also use all the cash proceeds from the sale on the purchase in order to completely defer the applicable capital gains tax.
THE RULES OF CONSTRUCTIVE RECEIPT
If the Exchanger is in constructive receipt of all or any portion of the proceeds from the sale of the Relinquished Property, those proceeds are taxable.