1031 Tax deferred exchange eligibility

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To qualify for a 1031 Tax Deferred Exchange, certain eligibility requirements must be met. Here are the key criteria:

1. Like-Kind Property: Both the relinquished property (the property being sold) and the replacement property (the property being acquired) must be of "like-kind." "Like-kind" refers to the nature or character of the investment, not the specific type or quality. Generally, real estate must be exchanged for real estate, but there is flexibility within real estate categories (e.g., residential for commercial property).
2. Held for Investment or Business: Both the relinquished and replacement properties must be held for investment, business, or productive use in a trade or business. Personal residences or properties held primarily for resale (e.g., "flipping" properties) do not qualify for a 1031 exchange.
3. Intent to Exchange: The taxpayer's intent at the time of the exchange must be to complete a 1031 exchange. This means the purpose of the exchange should be for investment or business purposes and not for immediate resale or personal use.
4. Proper Timing: There are strict timeframes that must be followed in a 1031 exchange. After selling the relinquished property, the investor has 45 days to identify potential replacement properties and 180 days to complete the acquisition of the replacement property. Extensions to these deadlines are not allowed, except in cases of federally declared disasters or certain military actions.
5. Use of a Qualified Intermediary: To ensure the exchange is properly structured and to maintain tax-deferred status, a qualified intermediary (QI) must be used. The QI is an independent third party who facilitates the exchange by holding the funds from the sale of the relinquished property and transferring them to acquire the replacement property.
6. Same Taxpayer Rule: The taxpayer who sells the relinquished property must be the same taxpayer who acquires the replacement property. 
7. Avoiding Receipt of Funds: To defer capital gains tax, the taxpayer should not directly receive the sale proceeds from the relinquished property. The funds must be held by the qualified intermediary until they are used to acquire the replacement property.

Meeting these eligibility requirements is crucial to ensure that the exchange qualifies for tax deferral under Section 1031 of the Internal Revenue Code. It's essential to consult with tax and legal professionals when planning a 1031 exchange to ensure compliance with all IRS regulations and to maximize the benefits of the transaction.

The IRS has compiled a list of eligible participants for this exchange, including:

• Individuals
• C corporations
• S corporations
• Partnerships (general or limited)
• Limited liability companies
• Trusts
• Any other taxpaying entity