There are some people who claim that 1031 exchanges are a cure all to most of your real estate problems. What many gullible people don’t realize is that 1031 exchanges are not for everyone and are not appropriate in every situation:
One very important and simple requirement for a 1031 exchange is that it must be structured as a 1031 exchange before the transaction closes. This means you must assign a Qualified Intermediary into the transactions before you close the transaction.
Secondly, it is important to acquire replacement property that is equal to or greater in value than your relinquished property. You can buy property that is lower in value, only you’ll have to pay capital gains taxes on the amount that is not utilized. So in effect, you lose a load of money if you don’t invest correctly. In effect, this means you can always get more cash into the transaction, but cannot pull any cash out without creating potential taxable boot.
Another important requirement is that both the relinquished and the replacement properties must be held for rental, investment or use in your business. This means you cannot use 1031 exchange provisions for the sale of your primary residence.
There is quite a bit of confusion on the like kind property rule. Any type of real property is like kind to any other type of real property. You just have to ensure that you meet the requirements mentioned above.
The final most important rule is that you MUST stick by the time limits laid down for a 1031 exchange. This means you have 45 calendar days from the close of sale to identify potential replacement properties. You must complete the acquisition of some or all of the identified replacement property no later than 180 calendar days from the close of your sale transaction. Alternately you will need to complete the acquisition by the due date, including extensions, of your Federal income tax return.