Some types of property are specifically disqualified, namely: stock in trade or other property held primarily for sale; securities or evidences of indebtedness or interest; interests in a partnership or multi-member limited liability company; certificates of trust or beneficial interest; and chooses in action (i.e. interests in law suits).
Both the relinquished property and the replacement property must be held for productive use in a trade or business or for investment. The taxpayer cannot exchange into or out of the taxpayer's own primary personal residence, or property held for resale as a dealer.
Replacement property acquired in an exchange must be "like-kind" to the property being relinquished. All real property is like-kind: Raw land may be exchanged for land with a building. One property may be exchanged for more than one property. However, personal property, like a primary residence, is not like-kind to real property.
If a replacement property is acquired and then immediately sold, this may indicate that it was acquired for resale and cannot qualify for tax deferred treatment.
One property must be exchanged for another property, rather than sold for cash. The exchange is created through a Qualified Intermediary and required exchange documentation.
The taxpayer is required to identify the replacement property within 45 days after the transfer of the relinquished property, AND must close on replacement property before the earlier of (a) 180 days after the transfer of the relinquished property, or (b) the due date of the taxpayer's federal income tax return (including extensions) for the year in which the relinquished property is transferred. Time limits are strictly construed and implemented.
Whether one property or more than one property is transferred by the taxpayer as part of one exchange, the number of replacement properties that may be identified is:
(1) Up to three properties, without regard to their fair market value. (The Three-Property Rule)
(2) More than three properties, if the total fair market value of all these properties at the
end of the 45-day identification period does not exceed 200% of the total fair market value of all properties relinquished in the exchange. (The 200% Rule)
Generally, if the taxpayer is selling the relinquished property to an unrelated party, then the taxpayer may not acquire his or her replacement property from a relative or business in which the taxpayer or relatives own greater than 50%. There are some limited exceptions.
Construction must be done prior to the date that the taxpayer acquires title to the replacement property. Construction does not need to be completed before the 180th day; partial construction qualifies as replacement property.