1.What is the 45-day identification rule?
After closing on the sale of the relinquished property, the taxpayer has exactly 45 calendar days to identify potential replacement properties in writing to the qualified intermediary. No extensions are available for any reason—not illness, natural disaster, or market disruption. You may identify up to 3 properties regardless of value (Three-Property Rule), any number of properties with aggregate FMV not exceeding 200% of the relinquished property (200% Rule), or any number of properties if you close on at least 95% of the aggregate identified value (95% Rule).
2.What is a Delaware Statutory Trust and how does it enable 1031 exchanges?
A Delaware Statutory Trust (DST) is a legal entity that holds institutional real estate and issues beneficial interests to investors. The IRS ruled in Rev. Rul. 2004-86 that DST interests qualify as 'like-kind' replacement property in a §1031 exchange. DSTs allow investors to deploy 1031 proceeds into institutional-grade properties—medical offices, logistics centers, multifamily communities—without active management responsibilities, and allow fractional interests that precisely match exchange proceeds without remainder.
3.Can I do a 1031 exchange on primary residence?
No. Section 1031 applies only to investment property or property held for productive use in a trade or business. Primary residences are excluded. However, a primary residence that has been converted to a rental and held as such for at least 24 months may potentially qualify, though the IRS scrutinizes such conversions carefully. A separate strategy—the §121 exclusion (up to $500,000 exclusion for married couples on primary residences)—may apply to the residential portion.
4.What happens if I receive 'boot' in a 1031 exchange?
Boot is any non-like-kind property received in an exchange—cash, debt relief, personal property, or unlike real property. Boot is taxable to the extent of gain realized. For UHNW investors, avoiding boot requires: (1) reinvesting 100% of net proceeds, (2) replacing the debt on the relinquished property (either by taking on equal or greater debt on the replacement, or contributing additional cash), and (3) closing on replacement property that equals or exceeds the total value of the relinquished property.
5.Can a 1031 exchange defer the depreciation recapture tax?
Yes. Depreciation recapture under §1250 (at a maximum 25% federal rate for real property) and §1245 (ordinary rates for personal property) is also deferred in a properly structured 1031 exchange. The deferred recapture is embedded in the carryover basis of the replacement property and recognized only when that property is eventually sold in a taxable transaction—or can be deferred again through successive 1031 exchanges.