1. Qualified Intermediary (QI) Retained & Exchange Agreement Executed PRIOR to Closing

Statutory Rule (Treas. Reg. § 1.1031(k)-1(g)(4)): You cannot touch, control, or have constructive receipt of sale proceeds from Relinquished Property 1 for even a single second. The Qualified Intermediary (QI) must be assigned into the purchase and sale contract, and the closing attorney/title agent must receive formal exchange instructions to wire 100% of net proceeds directly into a segregated qualified escrow account.

2. Strict Adherence to the “Same Taxpayer” Vesting Rule

Statutory Rule (IRC § 1031(a)(1)): The legal tax entity relinquishing Asset 1 must be the exact identical tax entity acquiring Replacement Asset 2. A transfer between an individual name and a multi-member LLC (partnership return Form 1065) triggers full taxable recognition.

3. Complete Reinvestment Rule: Value, Equity & Debt Replacement

Statutory Rule (IRC § 1031(b)): To achieve 100% tax deferral with zero taxable boot, the replacement property acquisition must satisfy three quantitative hurdles:

• Equal or Greater Purchase Value: Replacement contract price ≥ Relinquished net sales price.
• 100% Equity Rollover: Reinvest all net cash proceeds held by the QI into Replacement Asset 2.
• Equal or Greater Debt Replacement: Replace the paid-off mortgage liability with equal new debt, OR inject fresh outside cash to offset mortgage reduction.

4. Absolute 45-Day Identification Window (Midnight Rule)

Statutory Rule (IRC § 1031(a)(3)(A)): You have exactly 45 calendar days following the closing of Relinquished Asset 1 to formally identify replacement properties in a written, signed document delivered to your QI.

• 3-Property Rule: Identify up to three properties of any dollar value.
• 200% Rule: Identify four or more properties, provided their aggregate gross fair market value does not exceed 200% of Relinquished Asset 1's gross sales price.
• 95% Exception: If identifying more than three properties exceeding 200% value, you must acquire at least 95% of the aggregate value identified.

5. 180-Day Exchange Period & Tax Return Extension Interplay

Statutory Rule (IRC § 1031(a)(3)(B)): Replacement property must be acquired and closed by the earlier of:

1. 180 calendar days after the date Relinquished Property 1 was transferred, OR
2. The due date (including extensions) of the taxpayer's federal income tax return for the tax year in which the transfer occurred.

6. Section 1245 & 1250 Recapture Matching on Replacement Property

Statutory Rule (Treas. Reg. § 1.168(i)-6 & IRC § 1245(b)(8)): When you sell an asset that previously received accelerated cost segregation bonus depreciation, you carry heavy Section 1245 depreciation recapture exposure. Section 1245 ordinary recapture can only be fully deferred if Replacement Property 2 contains equal or greater Section 1245 tangible personal property.

7. State Tax Conformity & Clawback Audit (CA, NY, NJ, PA)

State Law Reality: While federal IRC § 1031 defers federal income tax, state laws vary dramatically:

• State Bonus Depreciation Decoupling: High-tax states (CA, NY, NJ, PA, NC) decouple from federal bonus depreciation, requiring substantial state tax add-backs.
• California & Oregon Clawback Laws: If you exchange out of California property into another state (e.g., Texas or Florida), California requires annual filing of FTB Form 3840 until you pay California tax upon eventual taxable sale.
• Pennsylvania Specifics: PA now recognizes Section 1031 exchanges for personal income tax under recent legislative conformity, but local transfer taxes remain non-deferrable.