Utah 1031 Exchange Rules: A Plain-English Guide

What is a 1031 exchange?

Section 1031 of the tax code lets you trade one investment property for another without paying tax on the gain at the time of the sale. The tax is deferred, not erased: your old property's tax basis carries over to the new one.

It only applies to real property held for investment or used in a business. Since 2018, it no longer applies to equipment, vehicles, or other personal property. It also does not apply to property you hold mainly to resell, like lots a developer builds and sells, or to your own home.

What property qualifies in Utah?

The IRS says real properties are generally like-kind to each other, whether they are improved or unimproved. That gives Utah County owners a lot of room:

• A rental home can be exchanged for a fourplex.
• Raw land or farm ground can be exchanged for an apartment building or a commercial property.
• A small commercial building can be exchanged for several rental homes.

A Utah-specific note: the IRS says certain shares in a mutual ditch, reservoir, or irrigation company can still qualify, when the company meets the tax-exempt requirements and state law treats the shares as real property. Ask your intermediary and CPA before counting water shares in an exchange.

Property in the United States and property outside it are not like-kind to each other.

What are the 1031 exchange deadlines?

Two clocks start the day your sale closes, and neither can be extended for weekends or holidays:

How many properties can you identify?

• Three-property rule: up to three properties of any value.
• 200% rule: any number of properties, as long as their total value is no more than twice what you sold.
• 95% rule: if you go past both limits, you must actually buy at least 95% of the value of everything you identified.

In Utah County, where good multifamily is scarce, the 45-day window is where most exchanges succeed or fail. We start looking before your sale closes.

How does a 1031 exchange work, step by step?

1. Plan before you list. Talk with your CPA and a qualified intermediary, and start looking at replacement properties.
2. Hire a qualified intermediary. The money from your sale must go to the intermediary, not to you. If you touch the money, even through your own agent, the sale is taxed. Your own attorney, accountant, or real estate agent from the last two years cannot serve as your intermediary.
3. Sell your property. The 45 and 180 day clocks start at closing.
4. Identify replacement property by day 45, in writing, following one of the rules above.
5. Close by day 180. The intermediary sends the money directly to the purchase.
6. Report it on Form 8824 with your federal return.

How do you avoid paying tax in a 1031 exchange?

Anything you receive that is not like-kind real property is called boot, and it is taxed. There are two common kinds:

• Cash boot: money from the sale you keep instead of reinvesting.
• Mortgage boot: paying off a loan on the old property and taking on a smaller loan, or none, on the new one. The IRS counts net debt relief as boot.

To defer all the tax, the usual rule of thumb is: buy property of equal or greater value, reinvest all of your cash, and replace your old debt with new debt or with added cash.

Depreciation recapture is deferred too, except to the extent you receive boot.

A Utah County example, with numbers

Here is a simplified illustration. Your CPA will run the real numbers for your situation.

If the owner simply sold, Utah's 4.45% income tax alone would be about $30,000 on that gain, before federal capital gains tax and depreciation recapture, which are much larger.

With a 1031 exchange into a $1,600,000 building, reinvesting all the equity and carrying equal or greater debt, that tax is deferred. The full equity keeps working, and the goal is more income than the fourplex produced, not less.

Illustration only, with made-up numbers. Not tax or legal advice. Federal rates depend on your income and how the gain is split between capital gain and depreciation recapture.

Common 1031 exchange mistakes

• Taking the money. If sale proceeds reach your account, the exchange fails.
• Starting the search after closing. 45 days goes fast in a tight market.
• Trading down. Buying something cheaper, or taking on less debt, creates taxable boot.
• Selling to or buying from family. With related parties, both sides generally have to hold their property for two years, or the deferral is lost.
• Exchanging a vacation home without meeting the rules. The IRS safe harbor requires owning it 24 months, renting it at fair rent at least 14 days in each of the two prior years, and limiting personal use.
• Exchanging property you are developing to sell. Lots or homes held mainly for sale do not qualify.