Legal Definitions - relinquished property

In the context of a 1031 exchange (also known as a like-kind exchange), relinquished property refers to the investment real estate that an individual or entity sells with the intention of deferring capital gains taxes.

A 1031 exchange allows an investor to postpone paying taxes on the profit from the sale of an investment property if they reinvest the proceeds into another qualifying "like-kind" investment property within specific timeframes. The relinquished property is the initial property that the investor gives up in this exchange.

For the exchange to be valid under IRS rules, the investor must:

• Identify the replacement property (the property they intend to acquire) within 45 days after transferring the relinquished property.
• Complete the acquisition of the replacement property within 180 days after transferring the relinquished property.

Examples of Relinquished Property:

• Example 1: Rental Home Upgrade

  An investor owns a single-family house that they have been renting out for several years. They decide to sell this house to purchase a larger duplex, which they also intend to rent out. The single-family house that the investor sells is the relinquished property in their 1031 exchange, allowing them to potentially defer capital gains taxes on its sale if they successfully acquire the duplex within the IRS-mandated deadlines.

• Example 2: Farmland for Commercial Space

  A landowner possesses a large tract of undeveloped farmland that they have been leasing to local farmers. They decide to sell this land and use the proceeds to acquire a small commercial office building in a nearby town, which they plan to rent to businesses. The undeveloped farmland that the landowner sells is the relinquished property, as it is the asset being exchanged for the commercial building to defer tax obligations.

• Example 3: Vacation Rental Relocation

  A couple owns a vacation rental condominium in a popular beach destination. They decide to sell this condo because they want to invest in a larger, more modern vacation rental property in a different resort area. The beach condominium they sell is the relinquished property within their 1031 exchange, as it is the asset they are giving up to acquire a new, like-kind investment property.