Many people have the idea that 1031 exchanges are complicated; that these are exact details rules which must be met. While the rules are different from what taxpayers are accustomed to seeing in other areas of the law, there really is a simple logic to them
Most of you remember the old law (which actually was repealed some years ago) dealing with the sale of your personal residence. When you sold your old house, you had two years to buy a new one and as long as you bought equal or up, the gain rolled over from the old house to the new one. That was Section 1034. Section 1031 sits right next to it in the Internal Revenue Code, and does the same thing for investment property that Section 1034 did for your personal residence (i.e. the gain rolls over from the old to the new).
There are six differences between old Section 1034 and Section 1031 that you need to be aware of when you consider a 1031 exchange.
1. Both your “OLD” property and your “NEW” property have to be investment property. Rental property, raw land or vacation homes are examples of investment property. If you meet this test, you can sell any type of deeded property (say an apartment building) and buy any other type of deeded property (say an office building).
2. From the date of closing on the sale of your old property, you have 45 days to come up with a list of properties you would like to purchase. That is called your “45 day list” and it is recommended that this list contain two or three potential properties.
3. Also, from the date of closing, you have 180 days to close the purchase of wherever property you are buying.. And what you are buying must be included on your 45 day list. Make a note, it is NOT 45 days and an additional 180 days. It is 180 days TOTAL.
4. You cannot touch the money. By law, the money must be held by a “Qualified Intermediary, (sometimes called as Accommodator” or a Facilitator”) who is responsible for the preparation of the paperwork required by the IRS to document the exchange. This paperwork must be in place before closing.
5. Title has to stay the same. Whoever held title to the old property has to end up as the titleholder of the new property.
6. You have to reinvest all of your cash, and your new property has to be at least equal to the net sales price of the old property. If not, you pay tax on the difference.

Follow these simple rules and you can enjoy one of the last loopholes in the tax code.

Please remember, I am NOT an attorney or an accountant. See your attorney or your accountant for your personal investment questions.