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Real Estate Exchanges under Irc §1031
Considering a 1031 Exchange?
Andrew R. McKinney & Associates, P.C. offers a wide range of Qualified Intermediary services. We can handle any type of 1031 tax exchange transaction.
The sale of real estate can create a large tax liability, but if the real estate is being held for productive use and investment, a properly structured tax deferred exchange under Internal Revenue Code §1031 allows businesses and individuals to defer the recognition of capital gains and other taxes associated with the sale, as long as the relinquished property is replaced with qualifying real estate.
By utilizing a 1031 Exchange, businesses and individuals are able to maximize their capital by deferring taxes that would otherwise be incurred on an outright sale of their property and use the entire amount of the equity from the 1031 Exchange to acquire substantially more replacement property. Properly structured, a 1031 Exchange becomes an invaluable tax savings and wealth preservation tool. For more information regarding a 1031 Exchange and how to property structure your next transaction, please contact our office.
The Basics
Exchange Cooperation Clauses
Delayed 1031 Exchange – Timelines, Deadlines and Identification
Exchange Structuring Strategies
Adding language to your real estate contract is important to reserve your ability to complete the exchange without interference.
Exchange Structuring Strategies
Delayed 1031 Exchange – Timelines, Deadlines and Identification
Exchange Structuring Strategies
Explore advanced 1031 exchange structuring strategies including reverse exchanges, improvement exchanges, partnership drop-and-swap structures, and DSTs. Gulf Coast real estate investors in Alabama and Mississippi rely on McKinney PC for sophisticated tax-deferred exchange guidance.
Delayed 1031 Exchange – Timelines, Deadlines and Identification
Delayed 1031 Exchange – Timelines, Deadlines and Identification
Delayed 1031 Exchange – Timelines, Deadlines and Identification
The most common type of exchange is referred to as a delayed exchange, although both transactions can be processed on the same day.
Exchange Cooperation Clauses
Relinquished Property Sale Contract
"Buyer hereby acknowledges that it is the intent of Seller to effect an IRC §1031 tax deferred exchange, which will not delay the closing or cause additional expense to Buyer. Seller’s rights under this agreement may be assigned to The Law Office of Andrew R. McKinney, P.C., a Qualified Intermediary, for the purpose of completing such an exchange. Buyer agrees to cooperate with Seller and Qualified Intermediary in a manner necessary to complete the exchange.”
Replacement Property Purchase Contract
"Seller hereby acknowledges that it is the intent of Buyer to effect an IRC §1031 tax deferred exchange, which will not delay the closing or cause additional expense to Seller. Buyer’s rights under this agreement may be assigned to The Law Office of Andrew R. McKinney, P.C., as Qualified Intermediary, for the purpose of completing such an exchange. Seller agrees to cooperate with Buyer and Qualified Intermediary in a manner necessary to complete the exchange.”
1031 Exchange Structuring Strategies
Advanced 1031 Exchange Structuring Strategies
A standard 1031 exchange is powerful, but many Gulf Coast real estate investors need more flexible or sophisticated structures to meet their goals. Whether you’re facing a competitive market, own property through an LLC or partnership, want to improve a replacement property, or are looking to shift into more passive investments, advanced structuring strategies can help you maximize tax deferral while aligning with your investment objectives.
Important Disclaimer. The information on this page is for educational purposes only and does not constitute legal, tax, or financial advice. Section 1031 exchange rules are complex and highly fact-specific. The IRS closely scrutinizes advanced structures. Every transaction depends on your unique circumstances. You should consult with a qualified tax advisor, CPA, and attorney before taking any action. McKinney PC serves clients throughout Alabama, Mississippi, and the Gulf Coast region.
Core 1031 Exchange Requirements
All structuring strategies must satisfy these fundamental rules:
- The properties must be like-kind real estate held for productive use in a trade or business or for investment.
- Strict timelines apply: 45 days to identify replacement property and 180 days to complete the exchange.
- A Qualified Intermediary (QI) is required to avoid constructive receipt of sale proceeds.
- The “same taxpayer” rule generally requires that the same taxpayer (or disregarded entity) that sells the relinquished property acquires the replacement property.
- Boot (cash, debt relief, or non-like-kind property) triggers taxable gain.
Advanced Structuring Strategies
Reverse 1031 Exchanges. In a reverse exchange, you acquire the replacement property first and later sell the relinquished property. This strategy is particularly useful in competitive markets or when an ideal replacement property becomes available before your current property sells.
A third-party Exchange Accommodation Titleholder (EAT) temporarily holds title to one of the properties under IRS safe harbor rules. Reverse exchanges remove the pressure of the 45-day identification window and give you more control over timing and financing.
Improvement (Build-to-Suit) Exchanges. An improvement exchange allows you to use exchange proceeds to fund qualifying improvements or construction on the replacement property during the 180-day exchange period. This strategy works well when existing inventory does not perfectly match your needs.
Improvements must be real property affixed to the land and completed within the exchange timeline. These exchanges are often combined with reverse exchanges for maximum flexibility.
Partial Exchanges. You don’t always have to fully defer your gain. In a partial exchange, you exchange most of the value and intentionally receive some boot (cash or debt relief). You pay tax only on the recognized boot portion while still deferring the majority of your capital gains. This approach provides liquidity when needed without derailing the entire exchange.
Partnership and LLC Structuring – Drop-and-Swap Strategies. Partnership and multi-member LLC interests generally do not qualify as like-kind property. When co-owners have different goals, a carefully structured “drop-and-swap” (or swap-and-drop) can allow some owners to cash out while others complete a tax-deferred exchange.
These transactions involve distributing tenancy-in-common (TIC) interests and require meticulous planning to withstand IRS scrutiny under step-transaction and disguised-sale rules. Early entity review and proper documentation are essential.
Delaware Statutory Trust (DST) Exchanges. A DST exchange allows you to exchange into fractional interests in a professionally managed, institutional-quality real estate portfolio (often triple-net leased properties). DST interests are treated as like-kind real property for 1031 purposes.
This strategy is popular among investors seeking to exit active management, diversify their holdings, or create more passive income while still deferring capital gains.
Multi-Property Exchanges. You can sell multiple relinquished properties or acquire multiple replacement properties in a single exchange (subject to identification rules). This flexibility supports portfolio consolidation, diversification, or strategic repositioning of your real estate holdings.
Common Pitfalls in Advanced 1031 Exchanges
Even sophisticated investors can run into problems. Frequent issues include:
- Failing the qualified use test (especially with short-term rentals or properties with significant personal use)
- Same-taxpayer and entity structuring mismatches
- Improper identification or missed deadlines
- Unexpected boot from debt relief or cash
- Aggressive partnership restructuring that triggers IRS challenge
- Related-party exchange complications
Our team helps clients identify and avoid these risks through careful planning and coordination with your tax advisors.
Why Work with McKinney PC for Your 1031 Exchange
As both experienced real estate attorneys and providers of Qualified Intermediary services, we bring a unique combination of legal and transactional expertise to every exchange. We understand the nuances of Alabama and Mississippi real estate, multi-state property issues, and the practical challenges Gulf Coast investors face.
We routinely assist clients with:
- Complex entity structuring and ownership planning
- Reverse and improvement exchanges
- Partnership and LLC transactions
- Integration of 1031 exchanges with estate planning and asset protection strategies
Our goal is to help you defer taxes legally and efficiently while protecting your wealth and advancing your long-term investment objectives.
Ready to Explore Your Options?
If you are considering a 1031 exchange or need help evaluating advanced structuring strategies for your situation, we would be glad to speak with you.
Contact us today to schedule a consultation. Phone: (251) 967-2166 Offices in Gulf Shores, Alabama and Ocean Springs, Mississippi. We serve real estate investors throughout Alabama, Mississippi, and the broader Gulf Coast region.
Delayed 1031 Exchange: Timelines, Deadlines & Identification
The most common exchange structure is the delayed “forward” exchange in which the Relinquished Property is sold, the proceeds (Exchange Funds) are delivered to the Qualified Intermediary and are subsequently used to acquire Replacement Property from a third-party seller. Two critical requirements in a delayed exchange are that the Replacement Property must be properly identified within the Identification Period and acquired before the end of the Exchange Period. IRC §1031(a)(3); Treas. Regs. §1.1031(k)-1(b)-(e). Following these regulations and time frames for exchange identification and deadlines is imperative for investors.
There are two key deadlines that the Exchanger must meet to have a valid exchange:
- Identification Period: Within 45 calendar days of the transfer of the first Relinquished Property, the Exchanger must identify the Replacement Property to be acquired.
- Exchange Period: The Exchanger must receive the Replacement Property within the earlier of 180 calendar days after the date on which the Exchanger transferred the first Relinquished Property, or the due date (including extensions) for the Exchanger’s tax return for the tax year in which the transfer of the first Relinquished Property occurs.
- The time periods for the 45-day Identification Period and the 180-day Exchange Period are very strict and cannot be extended even if the 45th day or 180th day falls on a Saturday, Sunday or legal holiday. They may, however, be extended by up to 120 days if the Exchanger qualifies for a disaster extension under Rev. Proc. 2007-56.
Replacement Property must be identified within the Identification Period by at least one of the following methods:
- Completed the purchase of the Replacement Property within the Identification Period; or
- Identified in a written document (Identification Notice), signed by the Exchanger, and delivered prior to the end of the Identification Period (by midnight of the 45th day), to the Qualified Intermediary or other permissible party to the exchange that is not a “disqualified person” or agent of the Exchanger. Treas. Reg. §1.1031(k)-1(c). Other allowable recipients of the Identification Notice include the seller of the Replacement Property or the settlement agent. Delivery to the Exchanger’s attorney or broker would not qualify as these parties are agents of the Exchanger. Best practice is to send the Identification Notice to the Qualified Intermediary prior to close of business on the last business day prior to the end of the Identification Period, so that the Exchanger can confirm timely delivery and receipt.
Requirements for a Proper Identification Notice:
- Must include a specific and unambiguous description of the Replacement Property
- Must be signed by the Exchanger
- For real property, the Identification Notice must include
a) the legal description,
b) a street address, or
c) a distinguishable name (i.e. “Empire State Building”) - For property to be produced, such as raw land to be acquired after improvements have been constructed, the Identification Notice should include a description of the underlying real estate and as much detail regarding the improvements as is practical, for example, 100 S. Main St., Gotham City, IL, improved with a 6 unit apartment building.
- When identifying Replacement Property, it is not necessary to separately identify any incidental property included in the purchase that has a value of less than 15% of the total value of the Replacement Property and that is typically transferred with the larger asset. This does not change the rule that only like kind properties qualify for exchange treatment. The value of the non like-kind property may not be attributed to the identified Replacement Property for purposes of deferring gain. For example, Relinquished Property is a rental house valued at $200,000, with $195,000 allocated to real estate and $5,000 allocated to appliances. If the sole Replacement Property is a rental condominium unit valued at $200,000, with $190,000 allocated to real estate and $10,000 allocated to appliances, the Exchanger would recognize $5,000 of boot, notwithstanding that only the condominium unit needs to be identified, and it is not necessary to separately identify the appliances. For purposes of the Three Property Rule, the condominium unit and appliances are treated together as one identified property.
- An identification of Replacement Property may be revoked prior to the end of the Identification Period. The revocation must be in writing, signed by the Exchanger and delivered to the same person to whom the original Identification Notice was sent. No changes or revocations may be made to the Identification Notice after the end of the Identification Period.
Exchangers have flexibility to identify multiple and alternate Replacement Properties.
A taxpayer may identify new properties utilizing one of two rules. There is also an exception to the two rules. But for ease of discussion, let’s say there are three identification rules. They are mutually exclusive, so a taxpayer may only use one rule at a time.
- Three Property Rule: The Exchanger may identify as potential Replacement Property any three properties, without regard to their fair market value.
- 200% Rule: The Exchanger may identify as potential Replacement Property any number of properties, provided the aggregate fair market value (as of the end of the Identification Period) of all of the identified properties does not exceed 200% of the aggregate fair market value of all of the Relinquished Properties.
- 95% Exception: If the Exchanger identifies more potential Replacement Properties than allowed under either the Three Property or the 200% Rules, the Exchanger will be treated as if no Replacement Property was identified. However, this does not apply with respect to any Replacement Property received before the end of the Identification Period and any properly identified Replacement Property received by the end of the Exchange Period if worth at least 95% of the aggregate fair market value of all of the identified Replacement Properties. Treas. Reg. 1.1031(k)-1(c)(4)(ii). For this purpose, fair market value of the aggregate Replacement Property is determined as of the earlier of the date the property is received by the Exchanger or the last day of the Exchange Period.
Disaster Relief Deadline Extensions
Revenue Procedure 2018-58 permits extensions of the IRC §1031 45-day Identification Period and 180-day Exchange Period deadlines to certain taxpayers affected by Federally (formerly called “Presidentially”) declared disasters and terroristic and military actions.
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