1031 exchange, tax and replacement

Tax Deferred Exchanges

The last remaining tax shelter for the disposition of real property!

A tax deferred exchange, as defined in Section 1031 of the
Internal Revenue Code of 1986, as amended, offers real estate
investors one of the last great investment opportunities to build
wealth and save taxes. By completing an exchange, the investor
(Exchanger) can move from their existing investment property to
another investment property and defer the capital gain tax that
would ordinarily be paid.

There are several requirements that must be met to defer the
capital gain tax: (a) the Exchanger must acquire "like kind"
replacement property and (b) the Exchanger cannot receive
cash or boot (unless the Exchanger pays capital gain taxes on
this boot). In any exchange the Exchanger must enter into the
exchange transaction prior to the close of the relinquished
property. The exchange can take place direct between two
parties. Party A transfers their property to Party B and Party B
transfers their property to Party A. This type of exchange is
uncommon. In most cases Party A wants Party Bs property but
Party B wants Party Cs property. When there are multiple
parties it is necessary to use an intermediary. The Exchanger
and the intermediary enter into an Exchange Agreement, which
essentially requires that (a) the intermediary acquires the
relinquished property from the Exchanger and transfers it to the
buyer by a direct deed from the Exchanger and (b) the
intermediary acquires the replacement property from the seller
and transfers it to the Exchanger by a direct deed from the seller.
The cash or other proceeds from the relinquished property are
assigned to the intermediary and are held by the intermediary in
a separate, secure account. The exchange funds are used by
the intermediary to purchase the replacement property for the
Exchanger.
IMPORTANT CONSIDERATIONS FOR AN EXCHANGE
Exchanges must be completed within strict time limits with
absolutely no extensions. The Exchanger has 45 days from the
date the relinquished property closes to "Identify" potential
replacement properties. This involves a written notification to
the intermediary listing the addresses or legal descriptions of
the potential replacement properties. The purchase of the
replacement property must be completed within 180 days after
of the close of the relinquished property. After the 45 days has
passed, the Exchanger may not change their Property
Identification list and must purchase one of the listed
replacement properties or the tax deferred exchange fails!

To avoid the payment of capital gain taxes the Exchanger
should follow three general rules: (a) purchase a replacement
property that is the same or greater value as the relinquished
property, (b) do not receive “boot” (unlike property such as cash,
debt relief, personal property, non-like property)

In the case of real property exchanges, the Exchanger must sell
property that is held for productive use in a trade or business or
for investment and acquire replacement property that will be
held for productive use in a trade or business or for investment
This is the "like kind" property test.

I.R.C Section 1031 does not apply to exchanges of stock in
trade, inventory, property held for sale, personal residence,
stocks, bonds, notes, securities, evidences of indebtedness,
certificates of trust, or beneficial interests or interests in a
partnership.
Key Benefits

Deferred tax payment

Use of tax dollars to reinvest

Possible reduced tax

Convenience Exchanges
A convenience exchange is a exchange that in not tax deferred but were the exchangers wish to
divest themselves of their property and rather than sell the property and using the proceeds to
purchase another property they directly exchange. This oftentimes produces a higher value for their
property and a expedited transaction.

The Exchanger is always advised to discuss the intended exchange with their legal or tax advisor