Like-Kind Exchange (IRC 1031) for Small Business Real Estate

1031 exchange rules:

What qualifies:

• Business real estate (office, warehouse, retail, shop)
• Investment real estate (rental properties, vacant land held for investment)
• Real property exchanged for real property (any type for any type: you can exchange a warehouse for an apartment building, or vacant land for a commercial building)
• Properties must be in the US (no foreign exchanges)

What does NOT qualify (after TCJA):

• Personal property (equipment, vehicles, machinery, furniture)
• Inventory or stock in trade (property held primarily for sale)
• Primary residence (your personal home)
• Partnership interests (but interests in an LLC that owns real estate may qualify)

Strict deadlines:

1. 45-day identification period: from the closing of the relinquished property, you have exactly 45 calendar days to identify potential replacement properties in writing to the qualified intermediary (QI). You can identify up to 3 properties (regardless of value) OR any number of properties as long as total value doesn’t exceed 200% of the relinquished property’s value.
2. 180-day exchange period: the replacement property must close within 180 calendar days of the relinquished property’s closing (or by the tax return due date, including extensions, if earlier).
3. These deadlines are absolute. No extensions, no exceptions, no “reasonable cause” relief. Missing either deadline by one day converts the exchange into a fully taxable sale.

Qualified intermediary (QI) requirement:

• A QI must hold the sale proceeds between the sale and the purchase
• The seller CANNOT touch the money at any point (this is called “constructive receipt” and disqualifies the exchange)
• The QI cannot be the taxpayer’s agent, attorney, accountant, or broker (within the prior 2 years)
• QI fees: typically $750-$1,500 per exchange

Boot (taxable portion):

• “Boot” is any non-like-kind property received in the exchange: cash, debt relief, personal property
• Example: sell for $500,000, buy replacement for $450,000. The $50,000 difference is “boot” and is taxable.
• To fully defer all gains: the replacement property must be EQUAL OR GREATER in value, and ALL equity must be reinvested (no cash pulled out)

Depreciation recapture:

• The replacement property inherits the depreciation schedule of the relinquished property
• This means the deferred gain is not forgiven, it’s deferred until a future taxable sale
• Exception: if the owner dies holding the property, the heir receives a stepped-up basis under IRC 1014, potentially eliminating the deferred gain entirely