Archive for the ‘FAQ’ Category

1. What is a tax deferred exchange?

Monday, February 25th, 2008

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 be held for investment or used in a trade or business. The essential element of such a trade is a reciprocal and interdependent transfer of one property for another, as opposed to a simple sale and repurchase. Effectively, I.R.C. Section 1031 exchanges allow investors to "sell" property and reinvest the proceeds in another without having to pay taxes that would otherwise be recognized (owed) on gain from the sale. The payment of such capital gains tax is deferred, representing only a potential tax, which is not owed unless and until the replacement property is sold in a subsequent taxable transaction. The taxes may, in some cases, be avoided all together. One example of this would be if the replacement property passes through an estate and its basis is stepped up to the market value at the time of death.

2. What are the advantages of a 1031 exchange?

Monday, February 25th, 2008

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 gains and recapture taxes you must pay upon a sale can amount to almost 40% of your gain. In a tax-deferred exchange, all of your profit may be used to acquire replacement property, not possible if you deplete your working capital by paying taxes. 1031 exchanges allow greater net profits, the purchase of larger or additional investment property, and a faster pyramiding of wealth.

Exchanges are a great tax planning mechanism allowing, for example, the deferment of taxes until the taxpayer is in a lower tax bracket, or until a more beneficial tax rate exists. There are a myriad of other reasons for exchanging, including for example: consolidation of a number of smaller properties into one larger investment in order to facilitate easier management or better cash flow; shifting investment from one area or locale to another to take advantage of local market opportunities; avoiding "deferred maintenance" by trading out the older properties into newer ones; diversification of investment portfolios by trading out of a single property, or type of property, or type of property, into various investments or multiple properties, to name a few.

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

Monday, February 25th, 2008

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.

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

Monday, February 25th, 2008

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 dealer property, only like kind property may be traded under the I.R.C. Section 1031 exchange rules. The property relinquished in the exchange must have been either productively used in your trade or business, or held for investment, i.e., you must have effected a "qualified use" of the property. Likewise, it must be your intention as you acquire your replacement, to either hold that property for investment or use it for a business purpose

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

Monday, February 25th, 2008

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. Conversely, vacant land, for example, is of like- kind to improved property as the two differ only in their grad/quality. Raw land, condominiums, single family residences, shopping centers, apartment buildings, farm and ranch land, commercial real estate, industrial property, second homes converted to investment property, and almost all other realty are of like-kind with respect to their intrinsic nature and character and may, therefore, be interchangeably exchanged. With limited exceptions, any real estate meeting the above tests can be exchanged for any other real estate. In addition, the rules excepting incidental property from the identification requirements should not be construed as meaning such property will be considered like- kind realty.

Remember, the final regulations for "Multi-Asset/Personal Property" exchanges provide for very narrow like-kind qualification of any non-realty business or investment property, which may be transferred together with real estate in your transactions. For example, any furniture, manufacturing or the equipment, autos, or artwork, etc. transferred in addition to real estate is not like kind to realty received as replacement property. The definition of realty is determined on a state by state basis within the United States, and any person wishing to exchange should determine the definition of realty according to the state or states where the relinquished and replacement properties are located.

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

Monday, February 25th, 2008

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 by a non dealer for future use or for future realization of the increment in value" (in other words, held for appreciation) is held for investment and qualifies. Qualifying property not held for investment must be used in a trade or business that you are engaged in. Practitioners generally agree that property which was acquired for a qualifying use but which is now inactive will continue to qualify. Theoretically, your intention to hold for productive use in a trade or business or for investment must satisfy the statutory requirement of the Code. However, a substantial risk of invalidation may exist in the event there is no obvious trade or business use and/or the holding period is of short duration. In such circumstances, the burden of proof weighs heavily and you are well advised to carefully document your intention to hold for investment. Lastly, minimum and incidental use of otherwise qualifying property may not necessarily disqualify property.

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

Monday, February 25th, 2008

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 in a Partnership
  • Certificates of Trust or Beneficial Interest
  • Chooses is Action
  • Real Property located within the United States is no longer like-kind with Real Property located outside of the United States

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

Monday, February 25th, 2008

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

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

Monday, February 25th, 2008

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 effect such subdivision and resale
  • Homes held for sale by speculation builders, such as builder's inventory of unsold homes
  • Any transaction which constitutes a sale followed by a reinvestment in other property, whether or not the replacement property is considered to be like-kind, wherein the transfers are not reciprocal and interdependent, and are absent an exchange agreement

10. Can foreign property be exchanged?

Monday, February 25th, 2008

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 foreign property.

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

Monday, February 25th, 2008

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 the law that a partnership interest, whether general or limited, cannot be exchanged for an interest in real property without recognition of gain. There are highly technical and relatively complex structures have may be employed in am attempt to legally circumvent the restrictions against exchanges of partnership interests. Skilled legal and/or accounting counsel must be engaged for such transactions.

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

Monday, February 25th, 2008

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.

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

Monday, February 25th, 2008

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 I.R.C. Section 1031, provided that the partnership dissolution and distribution occurs long enough before or after the exchange to satisfy the "held for investment" requirement. Such liquidation and/or conversion of partnership interests involve highly technical questions and favorable treatment of such transactions is by no means assured. Exchangers must secure qualified legal or accounting counsel before attempting these transactions.

14. Why do I need an intermediary?

Monday, February 25th, 2008

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 of a Qualified Intermediary.

The ACB Exchange also called the Alderson or Reverse Missouri Waltz Exchange. (Buyer buys replacement property form the seller, and then exchanges it with the exchanger for the relinquished property. These steps all occur simultaneously.)

Problem: (i) potential for, as hazardous waste liability to attach to buyer of replacement property buyer passes through the chain of title and deeds to the exchanger, and the potential for liens, clouds and judgments which might be filed against the buyer of the relinquished property to attach the replacement property, as the buyer enters the chain of title.

The ABC Exchange also called the Baird or Missouri Waltz Exchange. (The exchanger and the seller of the replacement property exchange properties, and the seller, who now owns the relinquished property, sells to the buyer. These steps occur simultaneously)

Benefit: Minimizes transfer tax consequences by having the double title transfer on the relinquished property, which has a lower value.

Problem: (i) potential for hazardous waste liability to attach to seller of the replacement property, as seller passes through the chain of title on the relinquished property and deeds to the ultimate buyer, and (ii) the potential for liens, clouds and judgments which might be filed against the seller of the relinquished property to attach the to the replacement property, as the seller enters the chain of title.

The Pot Exchange, (Any number of people put their "haves" and "wants" into one pot, and a single escrow officer or closing agent sorts everything out and delivers the appropriate "goods" to each party, whether that be property, cash or paper, etc. This is accomplished by a direct deed system, and must occur simultaneously.)
Benefit: Avoids or minimizes transfer taxes or potential hazardous waste liability.

Problem: Requires one very accurate and dedicated closing agent or escrow officer.

A Qualified Intermediary is always required for the two remaining types of exchanges:

  1. The Simultaneous Exchange With an Intermediary
  2. The Delayed Exchange With an Intermediary

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

Monday, February 25th, 2008

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 to a percentage exchange, where the exchanger may receive the percentage of the sale proceeds that result from the percentage of the sale not included in the exchange.) In order to insulate the sale of the relinquished property, all funds are held in a restricted account.

To qualify for tax deferment under I.R.C. Section 1031, exchanges must be pursuant to a written exchange agreement. Some intermediaries provide this documentation, precluding the exchanger’s needs to engage separate legal counsel to prepare the exchange agreement. Significant additional costs are incurred if the exchanger must engage counsel to draft such documentation, A Troika provides the exchange agreement and all other required exchange documents at no additional cost.

Tax deferred exchanges must, in essence, constitute a reciprocal exchange of properties between two parties, notwithstanding the fact that there are almost always three, four or occasionally more than four parties participating in an exchange. An important role of the intermediary is to become the exchanger’s other party to the exchange. Technically, the exchanger is trading property with the intermediary; this explains why the relinquished property is conveyed to the intermediary first, and then to the ultimate buyer. Likewise, the replacement property is transferred first to the intermediary and then to the exchanger. Exchange transactions are often extremely complex. A good intermediary helps explain, confirm and manage all aspects of the transaction, facilitating document signatures, escrow closing and the timely cooperation and performance of the parties to the exchange.

16. What is a qualified intermediary?

Monday, February 25th, 2008

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 on behalf of the exchanger.

  • Acquires the relinquished property from the exchanger and sells it to its ultimate buyer, using the proceeds of the sales to acquire and convey to the exchanger the replacement property.

Your intermediary should be a corporation rather than an individual in order to protect against your intermediary's death, disability, incapacity, judgments liens, etc. Furthermore, intermediaries should offer mechanisms and procedures designed to protect your transactions. It is also extremely important for an intermediary to employ proper custodial procedures for sale proceeds and other funds held in segregated, restricted accounts, through the use of a "Qualified Escrow" or a "Qualified Trust." The final rules for tax-deferred exchanges created a new category of accommodator or facilitator called a "Qualified Intermediary," and provided for certain tests which must be met in order to "qualify." In addition, these rules prescribe certain procedural requirements, which all Qualified Intermediaries must meet, together with prerequisite use of an exchange agreement containing express and specific language. As the Internal Revenue Service has vowed to pursue any taxpayers who use accommodators in deferred exchanges other than Qualified Intermediaries, exchangers should be extremely careful not to breach this requirement.

17. Can anyone be a qualified intermediary?

Monday, February 25th, 2008

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 the date of the first transfer of any relinquished property. Also disqualified are the family members of Disqualified Persons, as well as partnerships, corporations and other entities in which you, or your related party, own directly or indirectly, more than a 10% interest.

Example: Your attorney owns 11% of the stock in his law firm, and his wife owns her own intermediary firm. You wish to use his wife's intermediary firm as your Qualified Intermediary. If your attorney has done any work for you in the last two years, other than strictly I.R.C. Section 1031 tax-deferred work, his wife's firm is "disqualified" to act as you Qualified Intermediary. Conversely, if ten law firms each own 10% of a corporation organized to act as a Qualified Intermediary, you could use that Qualified Intermediary even though your law firm was one of the ten owners.

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

Monday, February 25th, 2008

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 the property received must be of "like-kind"

  • The exchange must be a reciprocal transfer of properties as distinguished from a sale and repurchase

There were other "rules" to come from the Final Regulations, such as Identification Period (45 Days), Exchange Period (180 Days), Form of Identification, Identification Rules, and the rule regarding the fact that you must acquire substantially what you have identified. There are other rules regarding restrictions on the funds from the exchange of the relinquished property. We will address these other rules as we proceed.

19. What is a safe harbor?

Monday, February 25th, 2008

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 Section 1031 Regulations are as follows:

Non-Cash Security for Buyer's Performance:

  • Mortgage or Deed of Trust

  • Standby Letter of Credit

  • Third Party Guarantee

Cash Security for Buyer's Performance:

  • Qualified Escrow

  • Qualified Trust

  • Qualified Intermediary (the only Safe Harbor that also applies to a Simultaneous Exchange)

Growth factors or interest, exchangers may earn interest on exchange funds

20. What is boot?

Monday, February 25th, 2008
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 only taxable to the extent of the realized gain. Transactions involving boot must be very carefully structured so as not to invalidate the qualifying portion of the trade. The receipt of money or non like-kind property will cause the realized gain, if any, to be recognized to the extent of the money and the fair market value of the unlike property received. In other words, you have to pay taxes on any money or other non like-kind property you receive in an exchange. Properly configured exchanges are structured so as to eliminate or minimize boot.

21. What is a reverse exchange?

Monday, February 25th, 2008

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 exchange property they own for property that must be acquired prior to the sale of the relinquished property. In a true reverse (or "Reverse Starker") exchange, the exchanger acquires the replacement property before conveying the relinquished property. The IRS in Revenue Procedure 200-37 issued rules addressing or allowing true reverse exchanges. As the taxpayer you will enter into a Qualified Exchange Accommodation Agreement (QEAA) and an Exchange Accommodation Title Holder (EAT) will acquire the replacement property. You must then identify your disposition property within 45 days and actually dispose of it by the 180th day.

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

Monday, February 25th, 2008

"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 further altered, etc., to the specifications of the exchanger. In a construction exchange, A Troika Consortium, Inc. usually acquires the replacement property, causes the improvements to be built during its ownership, and conveys the improved property to the exchanger. The building is done in accordance with the building specifications outlined in the purchase contract, and/or escrow instructions, prior to the substitution of A Troika Consortium, Inc. as the buyer. The exchanger approves all work done before disbursement of funds by A Troika Consortium, Inc. and exchangers may use the contractor of their choice, as long as they are not a "disqualified" person under the Regulations.

While real property improvements need not be completed within the Exchange Period, the value of any portion of the improvements not completed within the Exchange Period, will not qualify as replacement property. The 180-day Exchange Period may be manipulated by delaying the transfer of the relinquished property. This may allow some time for work to begin on construction of improvement on the replacement property. Property "to be produced" in a construction exchange, which is not completed within the 180-day Exchange Period, must be part of the standing structure to be considered real property under local law. A load of raw building material delivered to the building site, will not qualify as improved real estate.

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

Monday, February 25th, 2008

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.

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

Monday, February 25th, 2008
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 exchangor and hand-delivered, mailed, telecopied or otherwise sent to a person involved in the exchange and to the person responsible for delivery of the replacement property, usually the intermediary. Only one exception to the identification requirement is provided, which deems any replacement property actually acquired by the exchangor within the 45-day Identification Period to be duly identified property. You should document the sending and/or delivery of the identification letter and confirm their receipt. Every attempt should be made to have the identification document reviewed for conformance and accuracy in advance of the last day of the Identification Period. After that would be too late to make any required changes, an improper identification results in an invalid exchange.

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

Monday, February 25th, 2008

One of the following three rules must be followed when identifying replacement properties:

  1. 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.

  2. Any number of properties may be identified, provided that as of the end of the Identification Period, the aggregate fair market value of all identified replacement property does not exceed 200% of the fair market value of all relinquished property. This rule is known as the "Two Hundred Percent Rule." You may then acquire any number of those properties identified.

  3. Any number of properties may be identified as long as the exchanger actually acquires replacement property whose aggregate fair market value is at least 95% of the aggregate fair market value of all identified properties. This rule is known as the "Ninety-Five Percent Rule." Any property actually received by the exchangor during the identification period is deemed to have been properly identified.

26. Must I receive all identified properties?

Monday, February 25th, 2008

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 circumstances, the technical requirement is satisfied if you acquire 95% of the identified property. This rule however, is difficult to follow, as just one problem with one identified property could prevent you from acquiring 95% of all identified property.

27. Can I exchange with a related party?

Monday, February 25th, 2008

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 the acquired properties within the two-year period, the non-recognition provisions will not apply and the exchanger must recognize gain as of the date the disqualifying disposition occurs. A related party is defined by cross reference to I.R.C. Section 268(b) which covers a wide range of relationships including family members, corporations, partnerships and trusts.

28. What is “Constructive Receipt”?

Monday, February 25th, 2008

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. Any cash or boot received by the exchangor will cause recognition of gain (i.e., taxable income). This often happens when taxpayers erroneously believe that having the title company simply hold funds pending a repurchase will satisfy the regulations.

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

Monday, February 25th, 2008

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

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

Monday, February 25th, 2008

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 all relinquished property. If you trade down in either equity or debt, the difference may be taxable to the extent of your gain.

31. What is debt relief?

Monday, February 25th, 2008

"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 considered boot and will result in the recognition of gain unless offset by the payment of additional cash by the exchanger.

32. What is a partially tax-deferred exchange?

Monday, February 25th, 2008

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 which are a combination of the I.R.C. Section 1031 and an installment sale, when the "paper" is received by the exchanger

  • Exchanges involving replacement property which is compromised of business or investment property and personal property. You can arrange fully tax-deferred treatment on these exchanges if you do a multi-asset exchange, covering both the real and personal property

  • Exchanges where a portion of the gain is taken in cash or other "boot" property, and the balance of the gain is invested in qualifying replacement property.

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

Monday, February 25th, 2008

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 locate a seller of a replacement property who is willing to take the note as part of the consideration. If the seller is motivated and the note is well secured, this could be a viable approach. The intermediary, as the Beneficiary of the Note and Trust Deed, would give the cash and note to the seller in return for the replacement property. In this case the exchangor does not receive the "paper".

Option #2-The Intermediary could sell the note (usually at a discount) and apply the cash proceeds towards the acquisition of the Like-Kind replacement property. The cash proceeds would be added to the funds the Intermediary was holding from the sale of the relinquished property. Any discount from the sale of the note would have to be offset with additional cash from the Exchanger before the acquisition property is closed.

Option #3-An aggressive twist on #2. In a separate transaction, the Exchanger may purchase the note from the Intermediary. The Intermediary would, in turn, apply the combined funds from the note sale and the sale of the relinquished property to acquire a replacement property. Care must be taken so that the note sale is indeed a separate transaction. There is a possibility that the IRS would view the Exchanger's receipt of the not from the Intermediary as boot, or even worse, as constructive receipt, thereby endangering the exchange.

Option #4- If Option #3 cannot be properly documented, the Exchangor may wish to lend $20,000 to the Buyer of the relinquished property in a separate and independent transaction, in return for a note and deed of trust to be secured by the property. The Buyer would then purchase the property from the Intermediary for $200,000 cash. The Intermediary now has $200,000 cash to use to acquire the replacement property.

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

Monday, February 25th, 2008

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 other non like-kind property.

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

Monday, February 25th, 2008

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 to competent legal or tax advisors. A Troika Consortium, Inc. will assist you in procuring such help at your request.

36. Special Circumstances

Monday, February 25th, 2008

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 follows:

  • The Taxpayer enters into a deferred exchange and transfers his Relinquished Property in 1998. In 1999 he validly acquires replacement property and also receives some cash (boot). The cash will be taxed in 1999 on the installment method.

  • A Taxpayer enters into a deferred exchange and transfers his Relinquished Property in 1998. In 1999 the exchange fails and he receives the cash. The cash will be taxed as having been received in 1999 and given installment sale treatment.

  • A Taxpayer enters into a deferred exchange and transfers his Relinquished Property to a Qualified Intermediary. Upon the transfer of the Relinquished Property the Taxpayer also receives a note directly from the Buyer of the Relinquished Property. Notwithstanding the fact that the property was transferred to the Qualified Intermediary, but the note received from the Buyer, the Taxpayer will still receive installment sale treatment on the notes.

  • A Taxpayer enters into a deferred exchange and transfers the Relinquished Property to a Qualified Intermediary in 1998. The Qualified Intermediary concurrently sells the property to the Buyer. In addition to cash, the Buyer executes a note to the Qualified Intermediary, which is held in the exchange. In 1999 the Qualified Intermediary acquires Replacement Property but the note is not used in the acquisition. In addition to delivering the Replacement Property to the Taxpayer the Qualified Intermediary also delivers an assignment of the note. The Taxpayer may report the note on the installment method, as payments are received.

For purposes of installment sale treatment, the determination of whether the Taxpayer has "received payment" will be made without regard to the fact that an exchange agreement is secured by cash placed into a Qualified Escrow or a Qualified Trust and/or without regard to the fact that a Qualified Intermediary is used to facilitate the Exchange.