Purpose

Both the relinquished property and replacement property must be held for productive use in a trade or business or for investment. Personal residences, as well as property acquired for immediate resale, do not qualify for 1031 Exchange treatment.

Like Kind

Replacement property acquired in an exchange must be "like-kind" to the property being relinquished. All qualifying real property located in the United States is like-kind. Personal property that is relinquished must be either like-kind or like-class to the personal property which is acquired. Property located outside the United States is not like-kind to property located in the United States.

Exchange Requirement

The relinquished property must be exchanged for other property, rather than sold for cash and using the proceeds to buy the replacement property. Most deferred exchanges are facilitated by Qualified Intermediaries, who assist the taxpayer in meeting the requirements of Section 1031.

Vesting Requirement

It is required that the entity involved in an exchange remain consistent throughout the exchange.

Holding Period

There is no definitive holding period for property involved in a 1031 exchange transaction, with exception of property that involves related parties. This area of the IRC code is gray and subject to interpretation. In one private letter ruling the IRS did state that a minimum two year holding period would be sufficient. However, when a taxpayer is seeking advice on this issue, our first recommendation is that they seek the counsel of their personal tax advisor. A holding period of at least one year and one day is commonly used as a rule of thumb, but has no basis in statutory or case law. What the code does state is that the shorter the holding period, the more substantial evidence the taxpayer needs to have to prove their intent to hold the property for business or investment purposes.