1031 Exchange Legal Guidance with Peter S. Buas

A Like-Kind Exchange—commonly called a 1031 Exchange—is a tax-deferral strategy under Section 1031 of the Internal Revenue Code that allows investors to defer paying capital gains taxes when they sell an investment or business property, as long as the proceeds are reinvested into another qualifying property of equal or greater value. Rather than recognizing the gain and paying taxes immediately, the investor “exchanges” one property for another.

The proceeds from the sale of your original property cannot go directly to you—they must be deposited with a Qualified Intermediary and securely held until the purchase of the replacement property closes. 

Our office can handle all aspects of a 1031 Exchange: drafting the required exchange documents, serving as the Qualified Intermediary to hold funds, and managing the strict deadlines that apply.

A 1031 Exchange must be arranged beforeyou sell your original property. Once that sale closes, you are responsible for meeting two strict deadlines. Within 45 days, you must identify in writing the property (or properties) you intend to purchase as your replacement. Within 180 days of the sale, you must complete the purchase of one or more of those identified properties. These timelines run at the same time — the 45 days are part of the 180-day window. If the deadlines are missed, the exchange will not qualify and the sale will be taxable. Because there are no extensions, it’s important to plan carefully and work with professionals who can guide the process and keep deadlines on track.

If no replacement property is formally identified within 45 days of selling your original property, the exchange will no longer qualify as a 1031 Exchange. At that point, the proceeds held by the Qualified Intermediary will be returned to you, and the transaction will be treated as a standard sale.

 If the purchase of a replacement property is not completed within 180 days of the sale of your original property, the exchange will no longer qualify as a 1031 Exchange. At that point, the funds being held will be returned to you, and the transaction will be treated as a standard sale

Typical documents include:

• Exchange Agreement
  
  
• Like-Kind Exchange Addendum
  
  
• Assignment of Purchase and Sale Agreement
  
  
• Addendum to the Purchase Contract(for the replacement property)
  
  
• Assignment, Acceptance, and Notice of Replacement Property

No. A 1031 Exchange is limited to real property held for investment or business purposes. Personal residences, vacation homes primarily used for personal enjoyment, and property held strictly for personal use do not qualify. Only property held for productive use in a trade, business, or for investment is eligible.

Yes. You are not required to reinvest all of your sale proceeds into a replacement property. However, any portion of the funds that you choose not to reinvest will no longer qualify for tax deferral under the 1031 Exchange rules. Those leftover proceeds are commonly referred to as “boot,” and while they can be kept as cash, they are generally treated as taxable income.

By reinvesting the full amount, you maximize the tax-deferral benefit of the exchange. If you decide to reinvest only part of the proceeds, you will still receive some of the benefits of a 1031 Exchange, but only on the portion that is reinvested.

Yes. It is essential that you work with your accountant or tax advisor when planning a 1031 Exchange. A tax professional will ensure that the exchange is structured properly for your individual situation and that you receive the intended tax benefits.

Our role in the process is to manage the exchange deadlines, draft the required documentation, and serve as your Qualified Intermediary. We do not provide tax advice, and it is crucial that you coordinate with your CPA or tax advisor as part of the exchange.