A reverse exchange is somewhat more complex than a deferred exchange. It involves the
acquisition of replacement property through an exchange accommodation titleholder, with whom it
is parked for no more than 180 days. During this parking period the taxpayer disposes of its
relinquished property to close the exchange.
What property qualifies for a Like-Kind Exchange?
Both the relinquished property you sell and the replacement property you buy must meet certain
requirements.
Both properties must be held for use in a trade or business or for investment. Property used
primarily for personal use, like a primary residence or a second home or vacation home, does not
qualify for like-kind exchange treatment.
Both properties must be similar enough to qualify as "like-kind." Like-kind property is property of
the same nature, character or class. Quality or grade does not matter. Most real estate will be
like-kind to other real estate. For example, real property that is improved with a residential rental
house is like-kind to vacant land. One exception for real estate is that property within the United
States is not like-kind to property outside of the United States. Also, improvements that are
conveyed without land are not of like kind to land.
Real property and personal property can both qualify as exchange properties under Section 1031;
but real property can never be like-kind to personal property. In personal property exchanges, the
rules pertaining to what qualifies as like-kind are more restrictive than the rules pertaining to real
property. As an example, cars are not like-kind to trucks.
Finally, certain types of property are specifically excluded from Section 1031 treatment. Section
1031 does not apply to exchanges of:
• Inventory or stock in trade
• Stocks, bonds, or notes
• Other securities or debt
• Partnership interests
• Certificates of trust
What are the time limits to complete a Section 1031 Deferred Like-Kind Exchange?
While a like-kind exchange does not have to be a simultaneous swap of properties, you must meet
two time limits or the entire gain will be taxable. These limits cannot be extended for any
circumstance or hardship except in the case of presidentially declared disasters.
The first limit is that you have 45 days from the date you sell the relinquished property to identify
potential replacement properties. The identification must be in writing, signed by you and
delivered to a person involved in the exchange like the seller of the replacement property or the
qualified intermediary. However, notice to your attorney, real estate agent, accountant or similar
persons acting as your agent is not sufficient.
Replacement properties must be clearly described in the written identification. In the case of real
estate, this means a legal description, street address or distinguishable name. Follow the IRS
guidelines for the maximum number and value of properties that can be identified.