Taxpayers who participate in a tax-deferred exchange under Section 1031 of the Internal Revenue Code ("IRC §1031") are almost always advised about the timing restrictions involved in those transactions. However, not all taxpayers fully understand - or are correctly advised about - the restrictions. Taxpayers have 45 days from the disposition of the relinquished property within which to identify potential replacement property (or properties) to acquire. They also must complete their exchange before the earlier of 180 days from the disposition of the relinquished property or the due date of their tax return for the year in which the exchange was commenced. For example, if a calendar-year taxpayer disposed of relinquished property on December 1, 2010, their exchange period will expire on April 15, 2011. If the taxpayer wishes to ensure the availability of the full 180 days to acquire replacement property, they must file for an extension (using Form 8868). In the example above, if the taxpayer files for an extension, the taxpayer will have the full 180 days (May 30, 2011) to complete the exchange.

Under Section 1031 of the Internal Revenue Code ("IRC §1031") individuals and businesses may exchange qualifying property for like-kind replacement property. In qualifying transactions, the taxpayer defers recognition of up to 100% of the capital gains and depreciation recapture that would otherwise occur at the sale of the property. This transaction structure is known as a "like-kind exchange." Individuals and business who plan to sell an asset and acquire another one shortly thereafter should discuss IRC §1031 with their tax and legal advisors, and consider structuring the transaction as a like-kind exchange. The tax savings enable the reinvestment of more money into the replacement property.

Like-Kind Exchange Transaction Structure

In a typical like-kind exchange, the owner disposes of one property and then later acquires replacement property. Prior to the disposition of the relinquished asset, the owner and a qualified intermediary (QI) must enter an exchange agreement, and the owner's rights in the contract of sale must be assigned to the QI. The sale proceeds are deposited with the QI, who holds them on behalf of the owner between the disposition and subsequent acquisition of replacement property. As noted above, the owner has 45 days to identify like-kind replacement property, and a total of 180 days (or the due date of the tax return, whichever is earlier) to acquire qualifying replacement property. The replacement property contract is also assigned to the QI. The owner then directs the QI to send proceeds to the seller and the sale is completed.

Citibank's 1031 Exchange Service is a nationwide provider of QI services. Our professionals facilitate exchanges of various kinds of property, including artwork and collectibles as well as real estate, aircraft, equipment, fleet vehicles, racehorses, and other assets. They coordinate with a client's attorney and other professionals to ensure a smooth transaction at every step. Citibank's 1031 Exchange professionals help clients complete both the disposition of existing assets and the acquisition of new ones - from contract to closing.

Qualified Use Property

Only property held for investment or for productive use in a trade or business qualifies for a like-kind exchange. Assets held primarily for personal use or by a dealer as inventory cannot be exchanged under §1031. Therefore, the owner must establish that any asset exchanged was held for investment rather than personal use.
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Citibank, its affiliates and their employees are not in the business of providing tax or legal advice. Any discussion of tax matters is not intended to be and cannot be used or relied upon by any taxpayer for the purpose of avoiding tax penalties. Any such taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor.

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