A Relinquished Property refers to the property that an investor is selling or transferring as part of the exchange process. The 1031 exchange, also known as a “like-kind exchange” or a “Starker exchange,” allows investors to defer paying capital gains taxes on the sale of a property if they reinvest the proceeds into a new property that is of “like-kind.” This is pursuant to Section 1031 of the U.S. Internal Revenue Code.
Here’s a breakdown:
- Initiation of the Exchange: An investor who wishes to take advantage of a 1031 exchange decides to sell a property (this property becomes the Relinquished Property).
- Sale of the Relinquished Property: Once the Relinquished Property is sold, the proceeds from that sale are typically held by a qualified intermediary (QI) to ensure the funds are not “constructively received” by the investor. Constructive receipt would invalidate the 1031 exchange.
- Identification Period: After the sale of the Relinquished Property, the investor has 45 days to identify potential replacement properties.
- Acquisition of Replacement Property: Within 180 days of the sale of the Relinquished Property, the investor must close on the purchase of the new property (or properties), which is termed the “Replacement Property.” The funds held by the QI are used for this purchase.
By following these steps and ensuring all other 1031 exchange rules are met, the investor can defer capital gains taxes that would otherwise be owed on the sale of the Relinquished Property.