A Section 1031 like-kind exchange (LKE) enables an investor to exchange business or investment property for new property while deferring capital gains tax.
Once you have signed a contract for the sale of your business or investment property ("Relinquished Property"), contact CDEC for preparation of the exchange documents. Prior to closing, all exchange documents must be executed. At closing CDEC will instruct the escrow or title company to wire-transfer the sale proceeds into a separate Qualified Exchange Trust Account. Within 45 days after the date the Relinquished Property is transferred, a limited number of potential Replacement Properties must be identified. The identification must be made in a written document that is signed by you and delivered to CDEC within the 45-day window.
Replacement Property must be acquired by the earlier of 180 days after the date the Relinquished Property is sold - or - the due date of the tax return for the taxable year of the exchange, determined with regard to extensions. The funds in the trust must be used to acquire Replacement Property. The trust agreement specifies conditions under which the funds may be released if the exchange is not completed.
DENTIFYING REPLACEMENT PROPERTY - THE OPTIONS
The 3-Property Rule:
Within the 45-day period, up to three potential Replacement Properties may be identified, without regard to the aggregate fair market value.
The 200% Rule:
Within the 45-day period, any number of potential Replacement Properties may be identified provided the aggregate fair market value of the identified properties does not exceed 200% of the value of the Relinquished Property.
The 95% Rule:
Within the 45-day period, if more than three properties are identified and if the fair market value of all of the identified properties exceeds 200% of the value of the Relinquished Property, the identification will be valid only if you acquire at least 95% of what you have identified. This rule is typically used when an investor is acquiring a portfolio of properties and is trading up significantly.
The Relinquished Property and the Replacement Property must be "like-kind" to each other. Any property that is considered "real property" under local law will be like-kind to any other real property, regardless of whether the property is unimproved or improved, income producing or idle.
"Boot" is cash or other non-like kind property received in the exchange that causes gain recognition. There are two general rules that, if followed, will result in avoiding Boot and having a completely tax-deferred transaction:
• Reinvest all of the equity from the sale of the Relinquished Property, and
• Reinvest in Replacement Property of equal or greater value.
CONTINUITY OF OWNERSHIP
Replacement Property must be acquired by the same taxpayer that disposed of Relinquished Property. If property is held through a disregarded single-member entity, the underlying tax owner will be deemed the owner for purposes of the exchange.