Many investors searching for 1031 exchange properties for sale are really asking two questions: what can I buy, and how do I lock it in before Day 45? 1031 Federal Exchange is a qualified intermediary, not a broker, and we do not list or sell property. This guide covers what counts as replacement property, how triple net leased buildings and Delaware statutory trust interests fit, the identification rules, and how your broker and your qualified intermediary work together.
What Counts as Replacement Property
Since January 1, 2018, Section 1031 applies only to real property. Real property means land and improvements to land, unsevered natural products of land, and water and air space above land, along with interests in it such as fee ownership, co-ownership, a leasehold, an option to acquire real property, an easement and stock in a cooperative housing corporation. Real properties are generally like-kind to each other whether improved or unimproved, so you can sell a rental house and buy a warehouse or land. Two limits matter: real property in the United States is not like-kind to real property outside the United States, and property held primarily for sale does not qualify.
- Real property only, held for investment or for use in a trade or business
- Improved and unimproved real property are generally like-kind
- U.S. real property and foreign real property are not like-kind
- Property held primarily for sale, such as fix-and-flip inventory, does not qualify
Sources: IRS: Like-Kind Exchanges, Real Estate Tax Tips; Treas. Reg. 1.1031(a)-3 (eCFR); 26 U.S.C. 1031 (govinfo.gov)
Triple Net Leased Buildings and Delaware Statutory Trusts
A building you own that is leased to a tenant on a triple net basis is still real property that you own, so it can be replacement property like any other investment real estate. Investors who want to stop managing property often look at triple net leased buildings or at interests in a Delaware statutory trust. In Revenue Ruling 2004-86, the IRS held that a taxpayer may exchange real property for an interest in the Delaware statutory trust described in the ruling without recognizing gain, if the other Section 1031 requirements are met. The ruling is limited to a trust on its facts, so have any trust offering reviewed by your tax and legal advisors before you identify it.
Sources: Treas. Reg. 1.1031(a)-3 (eCFR); Rev. Rul. 2004-86 (IRB 2004-33)
How to Identify Replacement Property by Day 45
Identification must be a written document, signed by you, and delivered before the end of Day 45 to the person obligated to transfer the replacement property to you or to another person involved in the exchange, such as your qualified intermediary, an escrow agent or a title company. Sending it to your own attorney, real estate agent or accountant acting as your agent is not enough. Describe each property unambiguously, by legal description, street address or a distinguishable name.
- Three-property rule: identify up to three properties of any value
- 200 percent rule: identify any number of properties if their total value is no more than 200 percent of the value of the property you sold
- 95 percent rule: if you identify more than either rule allows, you must acquire at least 95 percent of the total value identified, or you are treated as identifying nothing
- Property you close on before Day 45 is treated as identified
- You can revoke an identification only in a signed writing delivered before Day 45 ends
Sources: Treas. Reg. 1.1031(k)-1 (eCFR); IRS Fact Sheet FS-2008-18
The 45 and 180 Days
The identification period starts on the day you transfer the property you sold and ends at midnight on Day 45. The exchange period ends at midnight on the earlier of Day 180 or the due date, including extensions, of your tax return for the year of the sale. The property you receive must be substantially the same as the property you identified. If you sell several properties in one exchange on different dates, both periods run from the earliest sale.
Sources: 26 U.S.C. 1031 (govinfo.gov); Treas. Reg. 1.1031(k)-1 (eCFR)
Buying From a Relative or a Related Company
If you exchange with a related person, such as a family member or a company you control, and either of you disposes of the property received within 2 years, the deferral is lost and the gain is taxed in the year of that disposition. Exceptions include a disposition after the death of either party, an involuntary conversion, and a disposition shown not to have tax avoidance as a principal purpose. Check related-party purchases with your tax advisor before you identify them.
Sources: 26 U.S.C. 1031 (govinfo.gov)
How Your Broker and Your Qualified Intermediary Work Together
Your broker, or a trust sponsor if you are considering a Delaware statutory trust, finds and negotiates the replacement property. 1031 Federal Exchange sets up the exchange before your sale closes, holds the proceeds so you never receive them, receives your signed identification and checks that it is in writing and within the three-property or 200 percent limits, and sends the funds to the replacement closing. Start your search before your sale closes: the 45 days begin the day it does.
Frequently Asked Questions
No. 1031 Federal Exchange is a qualified intermediary. Your broker, or a sponsor for a Delaware statutory trust, finds and sells replacement property. We hold the exchange funds, receive your identification and fund the closing.