1031 exchange basics for commercial property1031 exchange basics for commercial property 

Section 1031(a)(1) says no gain or loss is recognized on the exchange of real property held for productive use in a trade or business or for investment, if it is exchanged solely for real property of like kind that will also be held for business use or investment.^[1]

It is not all-or-nothing. If you also receive money or other property that is not like-kind, gain is recognized to the extent of that money and other property.^[3]

• Same nature or character. Properties are like-kind if they are of the same nature or character, even if they differ in grade or quality.^[2]
• Improved or unimproved. Real properties generally are like-kind to each other whether they are improved or unimproved.^[2] Under that rule, vacant land and an industrial building can both be like-kind real property.
• Business or investment use. Both the property you give up and the property you receive must be held for productive use in a trade or business or for investment.^[1]
• Not property held for sale. The rule does not apply to real property held primarily for sale.^[1]
• U.S. and foreign property don't mix. Real property in the United States is not like-kind to real property outside the United States.^[2]

Under the Tax Cuts and Jobs Act, Section 1031 applies only to exchanges of real property, not personal or intangible property.^[2][3] Effective January 1, 2018, exchanges of machinery, equipment, vehicles, artwork, collectibles, patents and other intellectual property, and intangible business assets generally do not qualify.^[2] If equipment is sold along with an industrial building, ask your tax advisor how it is treated.

In a deferred exchange, you transfer the property you are giving up first and receive the replacement property later.^[4] The clock starts on the day you transfer the property you give up.^[1]

• 45-day identification period. The replacement property must be identified on or before the 45th day after that transfer.^[1] Identification must be in a signed written document that clearly describes the property, for example by legal description or street address, delivered as Publication 544 describes.^[4]
• 180-day exchange period. The replacement property must be received by the earlier of the 180th day after the transfer or the due date, including extensions, of your tax return for the year of the transfer.^[1][4]
• Multiple properties. If you transfer more than one property on different dates, both periods begin on the date of the earliest transfer.^[4]

You can identify more than one replacement property: either up to three properties regardless of value, or any number whose total fair market value is not more than double that of the properties you give up. Identifying more than that triggers a stricter rule, explained in Publication 544.^[4] Forty-five days goes quickly when you are touring sites, so start looking before your sale closes.

If, before you receive the replacement property, you actually or constructively receive money in full payment for the property you give up, the IRS treats the transaction as a sale rather than a deferred exchange, and you must recognize the gain, even if you later receive the replacement property.^[4]

A qualified intermediary (QI) is one of the IRS safe harbors against that. When you transfer property through a QI, the transfer of the property you give up and the receipt of like-kind property are treated as an exchange.^[3][4] A QI is a person who is not a disqualified person and who, under a written exchange agreement with you, acquires and transfers both the property you give up and the replacement property.^[4]

If you transferred property in a like-kind exchange during the tax year, you must file Form 8824 with your tax return for that year.^[3] The Form 8824 instructions also cover exchanges between related parties, where disposing of the property within two years can make the deferred gain reportable.^[3]

Our part is the real estate: we help investors sell commercial and industrial property and search for replacement property, so your 45-day list is built on real options. See our services and current listings. Your tax advisor, attorney, and qualified intermediary handle the exchange itself, so bring them in before you sign a contract to sell.