When engaging in a 1031 exchange, there are several key restrictions and requirements that must be adhered to in order to ensure the exchange qualifies for tax deferral under Section 1031 of the Internal Revenue Code. Here are some of the primary things that are not allowed in a 1031 exchange:

1. Non-Like-Kind Property: The properties involved in the exchange must be of like-kind. This means both the relinquished property and the replacement property must be held for productive use in a trade or business or for investment. Personal residences, inventory, stocks, bonds, and other securities do not qualify as like-kind property.
2. Constructive Receipt of Funds: The taxpayer must not have actual or constructive receipt of the proceeds from the sale of the relinquished property. This is where a qualified intermediary, like us at Deferred.com, plays a crucial role. We hold the proceeds from the sale and use them to acquire the replacement property on your behalf. If you receive the funds directly, even temporarily, the transaction may be disqualified as a 1031 exchange.
3. Failure to Meet Identification and Exchange Deadlines: The replacement property must be identified within 45 days of the sale of the relinquished property, and the exchange must be completed within 180 days. These deadlines are strict, and failure to meet them can result in the transaction being treated as a taxable sale.
4. Use of Exchange Funds for Non-Exchange Expenses: Exchange funds should not be used to pay for expenses unrelated to the exchange, such as personal expenses or improvements to the replacement property after acquisition. Certain transactional expenses related to the sale or purchase, like commissions and title fees, can be paid from exchange funds without disqualifying the exchange, but using funds for other purposes can result in taxable boot.
5. Related Party Transactions with Cash Out: Engaging in a 1031 exchange with a related party can be problematic if the related party receives cash or other non-like-kind property as part of the transaction. This can disqualify the exchange from nonrecognition treatment.

To illustrate these points, let's consider an example involving Deferred.com as your qualified intermediary:

Imagine you own an investment property, Property A, which you sell for $500,000. You want to defer the capital gains tax by engaging in a 1031 exchange. You identify Property B, another investment property, as your replacement property, which costs $500,000.

1. Like-Kind Property: Both Property A and Property B are held for investment purposes, making them like-kind.
2. Qualified Intermediary: You engage Deferred.com as your qualified intermediary. We hold the $500,000 proceeds from the sale of Property A and use them to purchase Property B on your behalf. You do not have direct access to these funds, preventing constructive receipt.
3. Deadlines: You identify Property B within 45 days of selling Property A and complete the purchase within 180 days, adhering to the strict timelines.
4. Exchange Funds: The funds held by Deferred.com are used solely for the purchase of Property B and related transactional expenses, such as title fees and commissions. You do not use these funds for personal expenses or improvements to Property B after acquisition.
5. Related Party Considerations: If Property B were owned by a related party, you would need to ensure that the related party does not receive cash or other non-like-kind property in the transaction to maintain the exchange's tax-deferred status.

By following these guidelines and using a qualified intermediary like Deferred.com, you can successfully complete a 1031 exchange and defer capital gains taxes on the sale of your investment property.