1031 Exchange :: Frequently Asked Questions

1031 Exchange - FAQs

Equity and Gain

Is my tax based on my equity or my taxable gain?

Your tax will always be based upon calculations of the taxable gain. Contrary to misconceptions, gain and equity are two separate and distinct items. When determining your gain, you should identify your original purchase price. From that, deduct any previously reported depreciation and then add the value of any improvements, if any, which have been made to the property. The resulting figure is your cost or tax basis. To calculate your gain, subtract the cost basis from your original net sales price.

Deferring All Gain

Is there a simple rule for structuring an exchange where all the taxable gain will be deferred?

If the following actions are performed, all taxable gain on your property is to be deferred.

1) A replacement property equal to or greater in value than the net selling price of your relinquished (exchange) property is purchased.

2) Equity is move from one property to the other.

Definition of Like-Kind

What are the rules regarding the exchange of like-kind properties? May I exchange a vacant parcel of land for an improved property or a rental house for a multiple-unit building?

If properties are of the same nature or character, regardless of whether or not they differ in grade or quality, they are "like-kind" properties. The two properties must be of the same type, disregarding any improvements made. To clarify, two residential pieces of real estate are "like-kind" towards one another. A residential piece of real estate and a car would not be.

Four most common 1031 exchange misconceptions:

All 1031 exchanges must involve swapping or trading with other property owners...... (NO)

Well before delayed exchanges were codified (by IRS) in 1984, all simultaneous exchange transactions of Real Estate required the actual swapping of deeds plus the simultaneous closing among all parties to a 1031 exchange. In most cases these type of exchanges were comprised of many of exchanging parties, as well as numerous exchange real estate properties. Now today, there's no such requirement to swap your own property with someone else's property, in order to complete an IRS approved exchange. The rules have been refined and ratified to the point that the current process is much more indicative of your qualifying intent, rather than the logistics of the Real Estate property closings.
Its required that all types of 1031 exchanges must close simultaneously....... (NO)

There was a time when all types of exchanges had to be closed on a simultaneous (same day) basis, now they (1031) are rarely completed in this type of format any longer. As a matter of fact, a majority of the exchanges executed are closed now as delayed exchanges.
"Like-kind" means purchasing the same type of property which was sold....... (NO)

Often the definition of "like-kind" has been misinterpreted or misunderstood to mean "The requirement of the acquisition of property to be utilized in the same form as the exchange property". In laymen's term, hotels are for hotels, apartments are for apartments, farms are for farms, etc. This is all true however, the exact definition is again more reflective of intent than its use. As a result, there are currently only 2 types of properties that qualify as a 'like-kind':
-- Property held for investment and/or

-- Property held for a productive use, as in a trade or business.
1031 Exchanges must be limited to 1 exchange and 1 replacement property....... (NO)

This statement is a perfect example of another 1031 exchanging myth. Let me repeat, there are no provisions within either the IRS Code or the US Treasury Regulations that can restrict the amount and number of real estate properties that can be involved in an exchange. Thus, in exchanging out of several properties into one replacement property or the vice versa of selling of one property and acquiring several other properties, are perfectly acceptable strategies and uses of a 1031.

Simultaneous Exchange Pitfalls

Is it possible to complete a simultaneous exchange without an intermediary or an exchange agreement?

It is possible to complete an exchange without an intermediary or an exchange agreement, yet is not recommended. In addition, it is very difficult to perform this process due to the Safe Harbor addition of qualified intermediaries in the Treasury Regulations and the recent adoption of good funds laws in several states. As two closing entities cannot hole the same exchange funds on the same day, the Exchanger is left with serious constructive receipt and other legal issues for attempting such a simultaneous transaction.

The main reason for the addition of the intermediary Safe Harbor was to suppress the practice of attempting such marginal transactions. Many tax professionals believe that an exchange that is completed without an intermediary or exchange agreement will not qualify for deferred gain treatment. If such a transaction had already been completed, it would not pass an IRS examination due to constructive receipt and structural exchange discrepancies. As you may have hesitation to invest in a qualified intermediary, we advise you to do so, as in comparison to the tax risk that is associated with attempting this exchange, the investment is easily insignificant.

Property Conversion

How long must I wait before I can convert an investment property into my personal residence?

A one-year holding period before investment is advised. As there is no definitive holding period that currently exists, the IRS did propose a one-year holding period before investment property could be converted, sold or transferred, yet it was never adopted by Congress. Please do not misconstrue the failure of the adoption of this proposal as an approval to convert investment property at any time. As the one-year period reflects the intent of the IRS, most tax practitioners advise clients to hold their property at least one year before converting into a personal residence.

As intent is extremely important, we remind you that it should be your intention at the time of acquisition to hold the property for its productive use in a trade or business, or for its investment potential.

Involuntary Conversion

What if my property was involuntarily converted by a disaster or I was required to sell due to a governmental or eminent domain action?

If your property is involuntarily converted, reinvestment must occur within 24 months from the end of the tax year in which the property was converted. It is also possible to apply for a 12 month reinvestment extension. This information is addressed within Section 1033 of the Internal Revenue Code for reference.

Facilitators and Intermediaries

Is there a difference between facilitators?

There is most definitely a difference in facilitators. Similar to most professional disciplines, the capability of facilitators will vary based upon their exchange knowledge, experience and real estate and/or tax familiarity.

Facilitators and Fees

Should fees be a factor in selecting a facilitator?

Fees should be a factor in selecting a facilitator, however, they should be considered only after first determining each facilitator's ability to complete a qualifying transaction. This can be accomplished by researching their reputation, knowledge and level of experience. It is recommended that fees are not considered first as you may get a good price, yet not good quality.

Personal Residence Exchanges

Do the exchange rules differ between investment properties and personal residences? If I sell my personal residence, what is the time frame in which I must reinvest in another home and what must I spend on the new residence to defer gain taxes?

The previously stated rules that dictated that you had to reinvest the proceeds from the sale of your residence within 24 months before or after the sale, and that you had to acquire a property which reflected a value equal or greater than the value of the residence sold, have been discontinued with the passage of the 1997 Tax Reform Act. These were formerly found in Section 1034 of the Internal Revenue Code. Currently, if a personal residence is sold, provided that residence was occupied by the taxpayer for at least two of the last five years, up to $250,000 (single) and $500,000 of capital gain is exempt from taxation.

Exchanging and Improvements

May I exchange my equity in an investment property and use the proceeds to complete an improvement on a vacant lot I currently own?

Although the attempt to move equity from one investment property to another is essential to tax deferred exchanging, unfortunately, you may not exchange into property you already own.

Related Parties

May I exchange into a property which is being sold by a relative?

Unfortunately, you cannot exchange into a property being sold by a relative. An Exchanger may sell to a related party; however, the related party will then be subject to a two-year holding period.

Exchanges During Divorce

I am married and I am going through a divorce, can I still do a 1031 exchange?

This is a very difficult question to explain because there is no clear answer set forth with the IRS and very little case law, on the subject. In most cases it is recommended that the title be switched to the person in need of a 1031 exchange (before the divorce is complete). The problem comes into play with the joint ownership of the property. What is needed is to get the property into ONE name and simplify things. This can be achieved in a number of different ways. First, you can simply execute a "quick claim deed" to get the property into one single name. Second, you can have your spouse simply buy out the other person involved and get sole title into ONE name. Another option is that you keep the property in both names and then buy the new property in both names - execute a 1031. Then once the 1031 is complete, split up the property, so that in this case taxes are deferred by both husband and wife. There is no clear answer on this subject so you have to speak with your accountant or attorney for legal or tax advice.

Partnership or Partial Interests

If I am an owner of investment property in conjunction with others, may I exchange only my partial interest in the property?

Yes you may. Partial interests qualify for exchanging within the scope of Section 1031 of the Internal Revenue Code. However, if your interest is not in the property but an interest in the partnership which owns the property, your exchange would not qualify. This is because partnership interests are excluded from Section 1031. But don't be confused! If the entire partnership desired to stay together and exchange their property for a replacement, that would qualify.

Another caveat, those individuals or groups owning partnership interests who desire to complete an exchange, and have for tax purposes, made an election under IRC Section 761(a) can qualify for deferred gain treatment under Section 1031. This can be a tricky issue! See elsewhere in this publication for more information. Then, only undertake this election with proper tax counsel and only with the election by all partners!

Reverse Exchanges

Are reverse exchanges considered legal?

Yes, reverse exchanges are considered legal. Although reverse exchanges were deliberately omitted from Section 1031, the Internal Revenue Service issued the addition of Revenue Procedure 2000-37 in September, 2000 which provides a safe harbor for reverse exchange transactions.

Selling A Business

I am selling my business, can I execute a 1031 exchange?

Yes, but it is important to determine first what portion of the business is actual property and what portion is deemed "business" or "good will". Only the portion that is deemed "property" can be applied to a 1031 Exchange.

Condo's and Co-Op's

I own a Condo or Co-OP, can I still do a 1031 Exchange?

Yes, In the state of New York, even a Co-Op is deemed Real Property and is qualified for a 1031 Exchange.

Identification

Why are the identification rules so time restrictive? Is there any flexibility within them?

The current identification rules represent a compromise which was proposed by the IRS and adopted in 1984. Prior to that time there were no time-related guidelines. The current 45-day provision was created to eliminate questions about the time period for identification and unfortunately, there is absolutely no flexibility written into the rule and no extensions are available.

In a delayed exchange, is there any limit to property value when identifying by using the Two Hundred Percent Rule?

Yes. Although you may identify any three properties of any value under the Three Property Rule, when using the Two Hundred Percent Rule there is a restriction. When identifying four or more properties, the total aggregate value of the properties identified must not exceed more than 200% of the value of the relinquished property.

There is an additional exception for those whose identification does not qualify for either the Three Property or Two Hundred Percent rules. The Ninety-five Percent Exception allows the identification of any number of properties, provided the total aggregate value of the properties acquired totals at least 95% of the properties identified.

Should identifications be made to the intermediary or to an attorney or escrow or title company?

Identifications may be made to any party listed above. On many occasions, however, the escrow holder is not equipped to receive your identification if they have no yet opened an escrow. Therefore it is easier and safer to identify through the intermediary, provided the identification is postmarked or received within the 45-Day Identification Period.

Master Lease

What is a "Master Lease" and how does it work?

The master lease is a management structure where a single entity is known as the "master lessee". The management company leases the entire property from the owners in return for a stipulated rent. This means that the owners [the investors] have a single tenant and predictable, stable rent, which will be stated in the prospectus accompanying the offering. Under the "triple net lease", the master lessee is responsible for all aspects of management, maintenance, repairs and leasing; and furthermore is responsible for paying expenses associated with the property, including real estate taxes and assessments, insurance and all maintenance and repair costs (excluding capital expenditures). Should these costs increase, the master lessee is obligated to pay them without reducing the rent due the owners.

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What is a tax-deferred exchange?

In a typical transaction, the property owner is taxed on any gain realized from the sale. However, through a Section 1031 Exchange, the property owner is able to defer capital gains tax until some future date.
Section 1031 of the Internal Revenue Code provides that no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business, or for investment. A tax-deferred exchange is a method by which a property owner trades one or more relinquished properties for one or more replacement properties of "like-kind", while deferring the payment of federal income taxes and some state taxes on the transaction.

The theory behind Section 1031 is that when a property owner has reinvested the sale proceeds into another property, the economic gain has not been realized in a way that generates funds to pay any tax. In other words, the taxpayer's investment is still the same, only the form has changed (e.g. vacant land exchanged for apartment building). Therefore, it would be unfair to force the taxpayer to pay tax on a "paper" gain.

The like-kind exchange under Section 1031 is able to defer capital gains tax, it is not tax-free. When the replacement property is ultimately sold (not as part of another exchange), the original deferred gain, plus any additional gain realized since the purchase of the replacement property, is subject to tax.

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What are the benefits of exchanging vs. selling?

Section 1031 exchange is one of the few techniques available to postpone or potentially eliminate taxes due on the sale of qualifying properties.

. By being able to defer the capital gains tax, you have more money available to invest in another property. In effect, you receive an interest free loan from the federal government, in the amount you would have paid in taxes.
. Any gain from depreciation recapture is postponed.
. You can acquire and dispose of properties to reallocate your investment portfolio without paying tax on any gain.

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What are the different types of exchanges?

Simultaneous Exchange: The exchange of the relinquished property for the replacement property occurs at the same time.
Delayed Exchange: This is the most common type of exchange. A Delayed Exchange occurs when there is a time gap between the transfer of the Relinquished Property and the acquisition of the Replacement Property. A Delayed Exchange is subject to strict time limits, which are set forth in the Treasury Regulations.
Build-to-Suit (Improvement or Construction) Exchange: This technique allows the taxpayer to build on, or make improvements to, the replacement property, using the exchange proceeds.
Reverse Exchange: A situation where the replacement property is acquired prior to transferring the relinquished property. The IRS has offered a safe harbor for reverse exchanges, as outlined in Rev. Proc. 2000-37, effective September 15, 2000. These transactions are sometimes referred to as "parking arrangements" and may also be structured in ways which are outside the safe harbor.
Personal Property Exchange: Exchanges are not limited to real property. Personal property can also be exchanged for other personal property of like-kind or like-class.

Qualifying Property - Certain types of property are specifically excluded from Section 1031 treatment: property held primarily for sale; inventories; stocks, bonds or notes; other securities or evidences of indebtedness; interests in a partnership; certificates of trusts or beneficial interest; and choses in action. In general, if property is not specifically excluded, it can qualify for tax-deferred treatment.
Proper Purpose - Both the relinquished property and replacement property must be held for productive use in a trade or business or for investment. Property acquired for immediate resale will not qualify. The taxpayer's personal residence will not qualify.
Like Kind - Replacement property acquired in an exchange must be "like-kind" to the property being relinquished. All qualifying real property located in the United States is like-kind. Personal property that is relinquished must be either like-kind or like-class to the personal property which is acquired. Property located outside the United States is not like-kind to property located in the United States.
Exchange Requirement - The relinquished property must be exchanged for other property, rather than sold for cash and using the proceeds to buy the replacement property. Most deferred exchanges are facilitated by Qualified Intermediaries, who assist the taxpayer in meeting the requirements of Section 1031.

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What is Tenant in Common (also known as Undivided Fractional Interest)?

The purchase of a tenant in common (or undivided fractional interest) structure allows investors to purchase an interest in a significant real estate asset, perhaps larger than they could obtain individually. The investor acquires a percentage ownership (title and deed) and receives passive rental income while receiving the tax benefits of traditional real estate. The investors own and control the properties, not a third party. TIC ownership provides investors with the first ever means for ownership diversity, both in location and type, of their real estate portfolio.

Unlike partnership real estate, TIC ownership entitles each owner to the same ownership rights regardless of the equity invested. This element of the investment structure puts no individual owner (or group of owners) in direct control of the property over any other investor(s).

You can truly have all of the ownership benefits and security of a large commercial asset with significantly fewer obstacles. As with any type of investment real estate, the value of a fractional interest typically increases annually due to escalations inherent in most tenant leases.

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How Can I Use Tenant in Common to Make an Investment?

Best known for the use of tenant in common structured real estate investments approved for use in §1031 exchanges. Many investors also use these acquisitions for cash and IRA investments. Structuring all offerings with "non-recourse" amortizing debt and passive income makes them ideal for any type of investment. Used as an IRA investment, UFI ownership properties have the same tax treatment (deferred taxation) as any other IRA approved investment.

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What are the requirements for a valid exchange?

Qualifying Property - Certain types of property are specifically excluded from Section 1031 treatment: property held primarily for sale; inventories; stocks, bonds or notes; other securities or evidences of indebtedness; interests in a partnership, and certificates of trusts or beneficial interest. In general, if property is not specifically excluded, it can qualify for tax-deferred treatment.
. Proper Purpose - Both the relinquished property and replacement property must be held for productive use in a trade or business or for investment. Property acquired for immediate resale will not qualify. The taxpayer's personal residence will not qualify.
. Like Kind - Replacement property acquired in an exchange must be "like-kind" to the property being relinquished. All qualifying real property located in the United States is like-kind. Personal property that is relinquished must be either like-kind or like-class to the personal property which is acquired. Property located outside the United States is not like-kind to property located in the United States.
. Exchange Requirement - The relinquished property must be exchanged for other property, rather than sold for cash and using the proceeds to buy the replacement property. Most deferred exchanges are facilitated by Qualified Intermediaries, who assist the taxpayer in meeting the requirements of Section 1031 so that the taxpayer can defer capital gains tax.

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What are the general guidelines to follow in order for a taxpayer to defer all the taxable gain?

The value of the replacement property must be equal to or greater than the value of the relinquished property.
. The equity in the replacement property must be equal to or greater than the equity in the relinquished property.
. The debt on the replacement property must be equal to or greater than the debt on the relinquished property.
. All of the net proceeds from the sale of the relinquished property must be used to acquire the replacement property.

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When can I take money out of the exchange account?

Once the money is deposited into an exchange account, funds can only be withdrawn in accordance with the Regulations. The taxpayer cannot receive any money until the exchange is complete. If you want to receive a portion of the proceeds in cash, this must be done before the funds are deposited with the Qualified Intermediary.

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Can the replacement property eventually be converted to the taxpayer's primary residence or a vacation home?

Consult your legal or tax advisor before converting the property.

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What is a Qualified Intermediary (QI)?

Qualified Intermediary is an independent party who facilitates tax-deferred exchanges pursuant to Section 1031 of the Internal Revenue Code. The QI cannot be the taxpayer or a disqualified person.
. Acting under a written agreement with the taxpayer, the QI acquires the relinquished property and transfers it to the buyer.
. The QI holds the sales proceeds, to prevent the taxpayer from having actual or constructive receipt of the funds.
. Finally, the QI acquires the replacement property and transfers it to the taxpayer to complete the exchange within the appropriate time limits in order for the taxpayer to defer capital gains tax.

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Why is a Qualified Intermediary needed?

The exchange ends the moment the taxpayer has actual or constructive receipt (i.e. direct or indirect use or control) of the proceeds from the sale of the relinquished property. The use of a QI is a safe harbor established by the Treasury Regulations. If the taxpayer meets the requirements of this safe harbor, the IRS will not consider the taxpayer to be in receipt of the funds. The sale proceeds go directly to the QI, who holds them until they are needed to acquire the replacement property. The QI then delivers the funds directly to the closing agent.

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Can the taxpayer just sell the relinquished property and put the money in a separate bank account, only to be used for the purchase of the replacement property?

The IRS regulations are very clear. The taxpayer may not receive the proceeds or take constructive receipt of the funds in any way, without disqualifying the exchange.

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If the taxpayer has already signed a contract to sell the relinquished property, is it too late to start a tax-deferred exchange?

No, as long as the taxpayer has not transferred title, or the benefits and burdens of the relinquished property, she can still set up a tax-deferred Exchange. Once the closing occurs, it is too late to take advantage of a Section 1031 tax-deferred exchange (even if the taxpayer has not cashed the proceeds check).

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Does the Qualified Intermediary actually take title to the properties?

No, not in most situations. The IRS regulations allow the properties to be deeded directly between the parties, just as in a normal sale transaction. The taxpayer's interests in the property purchase and sale contracts are assigned to the QI. The QI then instructs the property owner to deed the property directly to the appropriate party (for the relinquished property, its buyer; for the replacement property, taxpayer).

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What are the time restrictions on completing a Section 1031 exchange?

A taxpayer has 45-days after the date that the relinquished property is transferred to properly identify potential replacement properties. The exchange must be completed by the date that is 180 days after the transfer of the relinquished property, or the due date of the taxpayer's federal tax return for the year in which the relinquished property was transferred, whichever is earlier. Thus, for a calendar year taxpayer, the exchange period may be cut short for any exchange that begins after October 17th. However, the taxpayer can get the full 180 days, by obtaining an extension of the due date for filing the tax return.

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What if the taxpayer cannot identify any replacement property within 45-days, or close on a replacement property before the end of the exchange period?

Unfortunately, there are no extensions available. If the taxpayer does not meet the time limits, the exchange will fail and the taxpayer will have to pay any taxes arising from the sale of the relinquished property.

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Is there any limit to the number of properties that can be identified?

There are three 1031 exchange rules that limit the number of properties that can be identified. The taxpayer must meet the requirements of at least one of these three 1031 exchange rules:

First 1031 exchange rule:
. 3-Property Rule: The taxpayer may identify up to 3 potential replacement properties, without regard to their value; or
Second 1031 exchange rule:

. 200% Rule: Any number of properties may be identified, but their total value cannot exceed twice the value of the relinquished property, or Third 1031 exchange rule:

. 95% Rule: The taxpayer may identify as many properties as he wants, but before the end of the exchange period the taxpayer must acquire replacement properties with an aggregate fair market value equal to at least 95% of the aggregate fair market value of all the identified properties.

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What are the requirements to properly identify replacement property?

Potential replacement property must be identified in writing, signed by the taxpayer, and delivered to a party to the exchange who is not considered a "disqualified person". A "disqualified" person is any one who has a relationship with the taxpayer that is so close that the person is presumed to be under the control of the taxpayer. Examples include blood relatives, and any person who is or has been the taxpayer's attorney, accountant, investment banker or real estate agent within the two years prior to the closing of the relinquished property. The identification cannot be made orally.

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What happens if the exchange cannot be completed within 180 days? Should I consider a 1031 reverse exchange?

If the 1031 exchange period exceeds 180 days, then the exchange is outside the safe harbor of Rev. Proc. 2000-37. With careful planning, it is possible to structure a 1031 reverse exchange that will go beyond 180 days, but the taxpayer will lose the presumptions that accompany compliance with the safe harbor.

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Can the proceeds from the relinquished property be used to make improvements to the replacement property?

Yes. This is known as a Build-to-Suit or Construction or Improvement Exchange. It is similar in concept to a 1031 reverse exchange. The taxpayer is not permitted to build on property she already owns. Therefore, an unrelated party or parking entity must take title to the replacement property, make the improvements, and convey title to the taxpayer before the end of the exchange period.

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What is the difference between "realized" gain and "recognized" gain?

Realized gain is the increase in the taxpayer's economic position as a result of the exchange. In a sale, tax is paid on the realized gain. Recognized gain is the taxable gain. Recognized gain is the lesser of realized gain or the net boot received.

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Are Section 1031 Exchanges limited only to real estate?

No. Any property that is held for productive use in a trade or business, or for investment, may qualify for tax-deferred treatment under Section 1031. In fact, many exchanges are "multi-asset" exchanges, involving both real property and personal property.

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What is a "multi-asset" exchange?

A multi-asset exchange involves both real and personal property. For example, the sale of a hotel will typically include the underlying land and buildings, as well as the furnishings and equipment. If the taxpayer wants to exchange the hotel for a similar property, he would exchange the land and buildings as one part of the exchange. The furnishings and equipment would be separated into groups of like-kind or like-class property, with the groups of relinquished property being exchanged for groups of replacement property.

Although the definition of like-kind is much narrower for personal property and business equipment, careful planning will allow the taxpayer to enjoy the benefits of an exchange for the entire relinquished property, not just for the real estate portion.

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What is a reverse exchange?

A reverse exchange, sometimes called a "parking arrangement," occurs when a taxpayer acquires a Replacement Property before disposing of their Relinquished Property. A "pure" reverse exchange, where the taxpayer owns both the Relinquished and Replacement properties at the same time, is not allowed. The actual acquisition of the "parked" property is done by an Exchange Accommodation Titleholder (EAT) or parking entity.

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Is a reverse exchange permissible?

Yes. Although the Treasury Regulations still do not apply to reverse exchanges, the IRS issued "safe harbor" guidelines for reverse exchanges on September 15th, 2000, in Revenue Procedure 2000-37. Compliance with the safe harbor creates certain presumptions that will enable the transaction to qualify for Section 1031 tax-deferred exchange treatment.

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How does a reverse exchange work?

In a typical reverse (or "parking") exchange, the "Exchange Accommodation Titleholder" (EAT) takes title to ("parks") the replacement property and holds it until the taxpayer is able to sell the relinquished property. The taxpayer then exchanges with the EAT, who now owns the replacement property. An exchange structured within the safe harbor of Rev. Proc. 2000-37 cannot have a parking period that goes beyond 180 days.

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What happens if the exchange cannot be completed within 180 days?

If the reverse exchange period exceeds 180 days, then the exchange is outside the safe harbor of Rev. Proc. 2000-37. With careful planning, it is possible to structure a reverse exchange that will go beyond 180 days, but the taxpayer will lose the presumptions that accompany compliance with the safe harbor.

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Can the proceeds from the relinquished property be used to make improvements to the replacement property?

Yes. This is known as a Build-to-Suit or Construction or Improvement Exchange. It is similar in concept to a reverse exchange. The taxpayer is not permitted to build on property she already owns. Therefore, an unrelated party or parking entity must take title to the replacement property, make the improvements, and convey title to the taxpayer before the end of the exchange period.

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What is the difference between "realized" gain and "recognized" gain?

Realized gain is the increase in the taxpayer's economic position as a result of the exchange. In a sale, tax is paid on the realized gain. Recognized gain is the taxable gain. Recognized gain is the lesser of realized gain or the net boot received.

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I bought the property as a single person and I would like to acquire the replacement property together with my spouse?

The most conservative way is to stay consistent and complete the exchange the same way it was started and to add the spouse after the completion of the exchange. An exception can be made if there is a lender requirement that the spouse has to be added in order to qualify for a loan. If an exchange is planned well ahead of time, another solution would be to add the spouse to the title of the currently held property. Timing should be discussed with the CPA.

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I closed escrow on my first replacement property within the 45 day identificationperiod. Can I now identify three more properties within my 45 day identification period?

If you are using the three property rule, the completed acquisition counts as one and you may identify only up to two additional properties.

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How do I identify two different properties (or percentages of ownership through a TIC) covered by ONE purchase contract?

If the properties could be sold separately at a later date, they should be identified as two properties.

Every Section 1031 Exchange transaction is different. This 1031 exchange FAQ (Frequently Asked Questions) section is intended to answer general inquiries. The application of these principles will depend on the specific facts of each transaction. Always consult a competent Qualified Intermediary, attorney, or tax advisor to determine how an exchange may best be structured to accomplish your investment objectives.

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What is Boot?

Boot is any property received by the taxpayer in the exchange which is not like-kind to the relinquished property. Boot is characterized as either "cash" boot or "mortgage" boot. Realized Gain is recognized to the extent of net boot received.

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What is Mortgage Boot?

Mortgage Boot consists of liabilities assumed or given up by the taxpayer. The taxpayer pays mortgage boot when he assumes or places debt on the replacement property. The taxpayer receives mortgage boot when he is relieved of debt on the replacement property. If the taxpayer does not acquire debt that is equal to or greater than the debt that was paid off, they are considered to be relieved of debt. The debt relief portion is taxable, unless offset when netted against other boot in the transaction.

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What is Cash Boot?

Cash Boot is any boot received by the taxpayer, other than mortgage boot. Cash boot may be in the form of money or other property.

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What are the boot "netting" rules?

. Cash boot paid offsets cash boot received
. Cash boot paid offsets mortgage boot received (debt relief)
. Mortgage boot paid (debt assumed) offsets mortgage boot received
. Mortgage boot paid does not offset cash boot received

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Can you sell rental property and reinvest it into rental property without paying capital gains tax?

Unless you exchange properties in a qualifying like-kind exchange, you may not defer the gain on the sale of your rental property by purchasing replacement property. For additional information on like-kind exchanges, refer to Publication 544, Sales and Other Dispositions of Assets.

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I have heard that I can sell my rental property and use the proceeds to purchase rental property of greater value and the transaction is viewed just like an exchange in that the tax is deferred until the new property is sold. Is this true?

What you have heard about is a like-kind exchange. Like-kind exchanges are subject to several rules and restrictions listed in Publication 544, Sales and Other Dispositions of Assets.

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We sold a rental property last year and used the §1031 Tax Deferred Exchange law to defer the gains into another like-kind property. How do I handle this transaction on my tax return?

Report the exchange of like-kind property on Form 8824, Like-Kind Exchanges. The instructions for the form explain how to report the details of the exchange. Report the exchange even though no gain or loss is recognized.
If you have any taxable gain because you received money or unlike property, report it on Form 4797, Sales of Business Property, and Form 1040, SCHEDULE D, Capital Gains and Losses. Refer to Publication 544, Sales and Other Dispositions of Assets, which has a detailed section on like-kind exchanges.

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1031-CashFlow.com is for information purposes ONLY. 1031-CashFlow.com, nor it's owners or affiliates, offer any type of financial services. All investment strategies have risks. Past performance and/or forward statements are never an assurance of future results. Nothing contained herein shall constitute an offer to sell or a solicitation of an offer to buy any security.