Many housing providers own rental properties via a trust. Here we will review the different categories of trusts, and what impact they might have on 1031 exchanges. To successfully conduct an IRS-compliant tax-deferred exchange under IRC §1031, all taxpayers must follow a handful of simple rules: UNDERSTANDING TRUSTS AND 1031 EXCHANGES
• A Qualified Intermediary (aka an Exchange Accommodator) must receive, hold and re-invest the transaction funds on behalf of the taxpayer.
• To avoid paying any capital gains tax, one must replace the entire value of relinquished property (i.e., both equity and debt).
• After closing the sale of a relinquished property, a taxpayer has 45 days to identify replacement candidates, and 180 days to close the 1031-exchange purchase.
• On the “identification letter,” one must identify up to three or more properties of any value, provided their total value does not exceed 200% of the relinquished property value.
• All taxpayers should avoid buying 1031-exchange replacement property from a related party.
• Only rental and business property, acquired with the intent to hold for an indefinite period, will qualify for tax deferral under a 1031 exchange.
All of these rules apply regardless of the taxpayer’s ownership entity, but the ownership structure may affect one’s strategy, timing or replacement options.
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