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:

Replacement property must be unambiguously identified in writing.

In general, replacement property must be unambiguously identified in writing to another principal in the exchange prior to the expiration of the identification period. Identified replacement property must meet either the 200% rule, the three property rule or the 95% rule. Property not properly identified will be considered non like kind.

An unambiguous identification may be made by written accepted contract or otherwise but must provide a unique and singular description of the replacement property and must be in writing signed by the taxpayer. Real property is so described by a legal description, street address or distinguishable name.

The taxpayer must deliver the identification on or before midnight on the 45th day following the initial transfer date counting the initial transfer date as day number 1.

The preference is to deliver such notice to the qualified intermediary for the exchange. However, the identification may be delivered to the person responsible for delivering title to the replacement property to the taxpayer, or to a person involved in the exchange other than the taxpayer or a disqualified person.

Any replacement property received by the taxpayer prior to the end of the identification period is considered to be properly identified.

Answer:

No "Dealer" property is specifically excluded from §1031 treatment.

No. "Dealer" property is specifically excluded from §1031 treatment. By definition, "Dealer" property is held primarily for sale as inventory and not for the productive use in trade or business or for investment. Typical examples of "Dealer" property are subdivision lots held by the subdivision developer and condominium units held by the condo converter. These properties, in the hands of the developer and the converter do not qualify for §1031 treatment. However, the same property may qualify in the hands of another taxpayer who holds or intends to hold the property for business or investment use. Also, a dealer in one property may not be a dealer in another property and if the second property is held by the same party without dealer status then that property may qualify for non recognition treatment in an Exchange.

Answer:

§1031 (a) specifically excludes the following types of property.

§1031(a) specifically excludes the following types of property. Stock in trade, property held primarily for sale (dealer property) stocks and bonds, notes, choses in action (accounts receivable), certificates of trust or beneficial interest and securities or evidence of indebtedness.

In addition property held for personal use such as the taxpayers residence or second home or a vacation home where the use test for the tax year of the Exchange fails to classify the property as qualifying property are also excluded from §1031 treatment, and:

Foreign property, property outside the United States and the U.S. Virgin Islands, sale lease back property and leases less than 30 years in duration including extensions and renewal options are also excluded, and

In a delayed Exchange, like kind property not properly identified or property not identified within the identification period or identified property not actually received by the taxpayer within the exchange period or identified property in excess of certain limits on the identification of replacement property are be excluded.

Answer:

There must be an exchange, a reciprocal transer of relinquished property.

There must be an exchange, a reciprocal transfer of relinquished property for replacement property. A sale and a subsequent or simultaneous purchase does not constitute an exchange.

Both the relinquished property and the replacement property must be held by the taxpayer for the productive use in trade or business or for investment. Dealer property and personal use property in the hands of the taxpayer does not qualify but it is not material how the property is held by other parties to the exchange.

Both the property given and the property received must be like kind. If the requirements for identification and receipt are not met the replacement property will be considered as not being like kind.

The ownership of the relinquished property and the ownership of the replacement property must be the same tax reporting entity.