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1. What is a tax deferred exchange?

Section 1031 of the Internal Revenue Code provides that no gain or loss is recognized if property "held for productive use in a trade or business or for investment" is traded solely for the "like-kind" property that also is to … Continue reading

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2. What are the advantages of a 1031 exchange?

The primary advantage of exchanging under I.R.C. Section 1031 is the preservation of working capital. If you sell property you must pay taxes on any recognized gain. These funds will no longer be available to you for investment. The capital … Continue reading

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3. When do I have to pay the deferred tax?

If and when you elect to sell, as opposed to exchange, your replacement property, then the deferred gain will become taxable. With proper planning, you may defer the tax for your entire investment career.

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4. What kind of Real Estate qualifies for a 1031 exchange?

Generally, all real property is "like-kind" to all other real property within the US. Like kind property is property which is not identified as your personal residence or second home, and was not acquired for resale or considered inventory or … Continue reading

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5. What is the definition of “like-kind”?

The words "like-kind" refer to the nature of your use of the property, not it’s character, grade or quality. For example, real property is not of like kind to personal property because they are of a different nature and character. … Continue reading

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6. What does “held for investment or productive use” mean?

Since the Code does not clearly define the term "held for productive use in a trade or business or for investment," the definition is subject to interpretation and has given rise to great uncertainty. Unproductive real estate that is "held … Continue reading

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7. Is there any property that may not be traded under IRC Section 1031?

Yes. The following property is specifically excluded under I.R.C. Section 1031 and therefore cannot be of "like-kind": Stock in trade or other property held primarily for sale Stocks, Bonds, Notes or other Securities or Evidence of Indebtedness or Interest Interests … Continue reading

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8. Can I exchange my principle residence under IRC Section 1031?

No. Personal residences are subject to their own special rules, and cannot be exchanged under I.R.C. Section 1031.

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9. What are some examples of property that may not qualify for exchange?

In addition to the non-qualifying property previously discussed, examples of property which probably will not meet the qualified use test are: Land which was acquired for the express purpose of subdivision and resale and was only held long enough to … Continue reading

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10. Can foreign property be exchanged?

As a result of the Revenue Reconciliation Act of 1989, real property within the United States and real property located outside of the United States are no longer of like kind. However, foreign property may still be exchanged for other … Continue reading

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11. Can I exchange my partnership interest in real estate?

No, with extremely limited exceptions, partnership interests are not like kind property. After much confusion, the Internal Revenue Code was amended in 1984 to specifically prohibit the deferral of tax on an exchange of partnership interests. Similarly, the exclusion clarified … Continue reading

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12. Can my partnership or corporation exchange real estate under IRC Section 1031?

Yes! Partnerships and corporations are legal entities and, as such, are allowed to exchange partnership property (as opposed to a partner's partnership interest) under I.R.C. Section 1031. Remember, these transactions involve the partnership trading the partnership's real property.

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13. Can I convert my partnership interest into a tenant-in-common just before or after my exchange?

It is generally accepted that, if a partnership is dissolved and the partner's partnership interest are converted upon distribution into divided or undivided real property ownership interests, the partners may than be able to trade such real property interests under … Continue reading

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14. Why do I need an intermediary?

An Intermediary is required in all transactions other than those outlined below: A two-party simultaneous exchange. (*Please see note below.) Benefit: Simple and Cost-Effective NOTE: The only safe harbor recommended by the Treasury Department for simultaneous exchanges is the use … Continue reading

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15. What does a qualified intermediary do during an exchange?

The intermediary typically serves many functions during an exchange. If the exchanger actually or “constructively” receives any or all of the proceeds of the sale of the relinquished property, the exchange will not be valid. (This rule would not apply … Continue reading

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16. What is a qualified intermediary?

An Intermediary is that entity or person who: Acts as the middle-man or "straw-man" in exchange transactions Holds the proceeds of the sale of the relinquished property; does and buying of replacement property or selling of the relinquished property necessary … Continue reading

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17. Can anyone be a qualified intermediary?

No. "Disqualified Persons" may not be Qualified Intermediaries. With limited exceptions, a Disqualified Person is any party who has acted as your agent, employee, attorney, accountant, investment banker/broker, or real estate agent or broker within the two-year period ending on … Continue reading

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18. What are the general statutory requirements for an I.R.C Section 1031 tax-deferred exchange?

The general statutory requirements for an I.R.C Section 1031 tax-deferred exchange are as follows: Both the property surrendered and the property received must be held for productive sue in a trade or business, or for investment The property surrendered and … Continue reading

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19. What is a safe harbor?

A Safe Harbor is a "suggestion" from the IRS. They are not substantive rules, but to the degree that auditing agents understand them, they will be applied as "Holy Writ." The safe harbors to come out of the final I.R.C … Continue reading

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20. What is boot?

Not all property transferred or received in an exchange may be of like kind. Other property or money can be transferred in an exchange, without invalidating the entire exchange. Such non like-kind property is called "boot". In general, boot is … Continue reading

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21. What is a reverse exchange?

Again, a delayed or deferred exchange is defined as those transactions in which a taxpayer transfers the relinquished property in exchange pursuant to the 45-day/180 day provisions enacted by Congress in 1984. Reverse Exchanges are when an individual wish to … Continue reading

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22. What is a “build-to-suit” or construction exchange?

"Construction" or improvement exchanges are for replacement property to be built and are formally sanctioned by the new IRS Code. They consist of transactions in which the replacement property is built-to-suit, or in the case of already improved property, is … Continue reading

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23. Can I exchange investment or business property for improvements on land I already own?

Yes, in a series of letter rulings, the IRS has given reasonably clear guidance on this type of transaction. While somewhat complicated, A Troika Consortium, Inc. has arranged with outside legal counsel to structure and document these types of transactions.

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24. What are the requirements relating to the identification of replacement property?

All replacement property to be acquired in the exchange must be "unambiguously described" by legal description, assessors parcel number or tax map key or equivalent number, or address, distinguishable name, etc., and made in a written document executed by the … Continue reading

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25. How many properties may be identified as replacement properties?

One of the following three rules must be followed when identifying replacement properties: Three properties of any value may be identified. This rule is known as the "Three Property Rule." You may then acquire one, two or three properties identified. … Continue reading

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26. Must I receive all identified properties?

Only if you have relied on the 95% Rule. In other words, if you have identified more than three properties which have aggregate fair market values more than 200% of the fair market value of the relinquished property. In such … Continue reading

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27. Can I exchange with a related party?

The Revenue Reconciliation Act of the 1989 Legislative session effected a two year related party restriction wherein property conveyed to a related party is now subject to a two-year holding period. If either exchanger or the related party disposes of … Continue reading

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28. What is “Constructive Receipt”?

Constructive Receipt occurs in an exchange when the taxpayer has the unrestricted right to access cash or boot, whether or not such right is exercised, and regardless of whether there is actual or physical receipt of the cash or boot. … Continue reading

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29. Can I exchange more than one relinquished property or acquire more than one replacement property

Yes. You can exchange one relinquished property into one or more replacement properties, and visa versa.

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30. Must the replacement property I receive in the exchange have a minimum value?

Yes, for a fully tax-deferred exchange. If you wish to defer all taxes otherwise due upon sale, the aggregate fair market value of all replacement property received must be equal to or greater than the aggregate fair market value of … Continue reading

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31. What is debt relief?

"Debt Relief" or "Mortgage Relief" is any net reduction in the amount of liability on the replacement property after the exchange, as compared to the amount of liability on the relinquished property just prior to the exchange. It will be … Continue reading

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32. What is a partially tax-deferred exchange?

Partially tax-deferred exchanges are transactions in which some portion of the realized gain is recognized and some is not (i.e., you will pay some of the taxes due upon sale, but not all). Some examples of such exchanges are: Exchanges … Continue reading

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33. Can I finance the buyer’s purchase of my relinquished property?

Yes, the IRS has issued combined transaction reporting rules for a partial installment sale and partial exchange. An installment note can also be handled in one of several fashions to accomplish a “pure” exchange: Option #1- Exchanger can try to … Continue reading

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34. Exchanges seem so complicated, can you simplify the rules for me?

Yes. Remember this rule of thumb: Fully tax-deferred exchanges are effected when you properly identify and receive like-kind qualifying property of equal or greater value, subject to equal or greater debt, without any actual or constructive receipt of cash or … Continue reading

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35. Do I need an attorney or a tax advisor?

Competent legal and/or accounting counsel is always recommended and should always be engaged. Tax laws are continually changing and I.R.C. Section 1031 exchanges are often extremely complex or highly technical, requiring guidance and the answers to interpretive questions best left … Continue reading

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36. Special Circumstances

It is important to note that this section ONLY APPLIES if the tax payer had a bona fide intent to enter into a deferred exchange at the beginning of the exchange period. Examples of the most important points are as … Continue reading

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