Key Takeaways
- 45-day identification and 180-day completion deadlines are absolute—no extensions, no exceptions.
- 3-Property Rule is simplest and most common; 200% Rule for multi-property; 95% Rule rarely used.
- Boot (cash or mortgage) triggers immediate taxable gain—offset mortgage boot with additional cash.
- QI due diligence is a fiduciary-level decision—verify segregated accounts and financial stability.
This recap consolidates the 1031 exchange structures and instruments covered in Track 1. Test your understanding of timelines, identification rules, boot, and QI requirements.
Exchange Framework Review
1031 exchanges defer capital gains and depreciation recapture by reinvesting into like-kind replacement property. Two non-extendable deadlines: 45 days for identification, 180 days for completion. After TCJA, only real property qualifies—personal property exchanges are no longer eligible. The exchange is a deferral, not an exemption—but step-up in basis at death converts deferral to permanent elimination.
Identification Rules and Boot Review
Three identification rules: 3-Property (up to 3, any value), 200% (unlimited properties, total value ≤200% of relinquished), 95% (unlimited, must close on 95%+). Boot (cash or mortgage) is taxable. Cash boot: receiving exchange proceeds. Mortgage boot: lower debt on replacement. "Trade up or sideways, never down" in both value and debt for full deferral.
QI Requirements Review
The QI holds exchange proceeds, documents the exchange, and facilitates the replacement closing. QI selection requires due diligence: fidelity bond, segregated accounts, financial stability, FEA membership, no disqualified person relationships. QI fees: $750-$1,500. Require segregated (not pooled) accounts with FDIC insurance. The investor must never have actual or constructive receipt of exchange funds.
Key Takeaways
- ✓45-day identification and 180-day completion deadlines are absolute—no extensions, no exceptions.
- ✓3-Property Rule is simplest and most common; 200% Rule for multi-property; 95% Rule rarely used.
- ✓Boot (cash or mortgage) triggers immediate taxable gain—offset mortgage boot with additional cash.
- ✓QI due diligence is a fiduciary-level decision—verify segregated accounts and financial stability.
Sources
Common Mistakes to Avoid
Underestimating the complexity and strict timelines of a 1031 exchange
Consequence: Missed deadlines (45-day identification, 180-day closing) cannot be extended or appealed—the exchange fails and the full capital gain is taxable
Correction: Begin planning the exchange before listing the relinquished property; engage a Qualified Intermediary early and establish a timeline with all critical deadlines clearly marked
Confusing the identification rules (Three Property, 200%, and 95%) and over-identifying properties
Consequence: Identifying more than 3 properties without complying with the 200% Rule triggers the nearly impossible 95% Rule, causing the exchange to fail
Correction: Use the Three Property Rule (identify 3 or fewer) as the default; only use the 200% Rule when necessary and verify the aggregate value calculation before submitting
Test Your Knowledge
1.An investor sells a property for $600,000 via 1031 exchange. Under the 200% Rule, what is the maximum combined fair market value of replacement properties they can identify?
2.A relinquished property has a $300,000 mortgage that is paid off at closing. The replacement property has a $220,000 mortgage. What is the mortgage boot received?
3.Why is the Qualified Intermediary's role essential in a 1031 exchange?