Answer:

The Tax deferred exchange is a method by which a taxpayer may postpone the recognition of a taxable gain and the payment of tax on the sale of real property. The non recognition of gain is provided for under Section 1031 of the Internal Revenue Code. 

The tax deferred exchange is often called a tax free exchange because the exchange transaction does not cause the recognition of gain (or loss) at the time of the exchange. Instead, the recognition of the gain is postponed until some future date when the replacement property acquired in the exchange is sold or otherwise disposed of in a taxable transaction.

The postponement of the recognition of the gain and the associated gains tax may be considered an interest free loan from the government which is used to purchase the replacement property.

In addition, if the taxpayer exchanges the replacement property at some future date, the gain postponed in the original exchange may continue to be deferred along with the gain (profit) realized in the ownership of the replacement property.

In this way, a taxpayer may increase the amount of the interest free loan from the government at each subsequent exchange and, with appropriate tax planning, can avoid paying back the loan altogether if the last replacement property owned by the taxpayer is transferred to his heirs at the then fair market value by his estate.

Answer:

The sum of the cost adjusted basis.

The taxpayers original basis in the replacement property acquired in exchange is the sum of the adjusted cost basis of the relinquished property plus any additional consideration given for the property acquired. This basis is often called the substituted basis.

If no additional consideration is given, the substituted basis is the same as the adjusted cost basis of the relinquished property. When in the future, the taxpayer disposes of the replacement property in a fully taxable transaction, the previously unrecognized gain or loss will be subject to a tax. The recognition of the gain has been deferred until the time of the subsequent transfer.

Net boot paid in an exchange constitutes additional consideration given. Boot may be in the form of cash boot given, non cash boot given or mortgage boot given and the net amount when added to the basis of the relinquished property determines the substituted basis.

However, if boot is received in an exchange then several things occur which effect the substitute basis. First, boot received may cause the recognition of gain which increases the substituted basis and secondly, the boot received, in any form and regardless if gain is recognized or not, will reduce the substituted basis. The calculations for substituted basis are made more complex with the receipt of boot which in effect has reduced the amount paid for the relinquished property.

Also, if boot is received in an exchange then there must be an allocation of the substituted basis to the like kind property and the boot. The basis of the boot received will be the fair market value of the boot and the substitute basis for the like kind property will be the balance of the overall substitute basis.

Answer:

To postpone the recognition of the taxable gain.

The obvious reason to consider an exchange is to postpone the recognition of a taxable gain. However, there are many other tax reasons such as moving from non depreciable to depreciable property, exchanging and stepping up basis for depreciation, exchanging one property for multiple smaller properties for future sales and the spreading of the gain over time, altering the depreciation schedule and deferment of recapture taxes.

Most other reasons for exchanging fall into two general categories which are continuity of investment and business reasons. Some suggested reasons are to pyramid, to build an estate, to increase income, to assemble properties, to reduce or alter the terms of debt, to maintain continuity of ownership, to consolidate holdings, to take on management or reduce management, to relocate assets, to generate some cash, to increase or decrease leverage and many others.

Answer:

Yes. The acceptance of an offer to sell does not constitute a taxable event.

Yes. The acceptance of an offer to sell does not constitute a taxable event. However, the sale will most likely be taxable upon the full performance of the sale agreement by the taxpayer unless prior to that time, the taxpayer has entered into an exchange agreement and subsequently acquires qualifying like kind property in exchange.