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:

Yes in many cases but not all.

Yes in many cases but not all. The amount of mortgage relief in an exchange is called "mortgage boot received" and is taxable to the extent it is less than the realized gain had the property been sold. However, if the exchangor adds cash to the transaction, gives cash boot, the cash boot given will offset the mortgage boot received and may reduce the tax liability to zero.

This potential tax liability is independent of the type or nature of the debt given or received. The debt may be new mortgages or mortgages taken subject to or assumed by the other party, may be recourse or non recourse or may be purchase money mortgages financed by the seller. Also, mortgages given up and mortgages taken on may be in first position or may be subordinate to one or more other mortgages.

The amount of mortgage relief is the difference between the mortgages given up on the disposition of the relinquished property and the mortgages taken on with the acquisition of the replacement property. If mortgages taken on are less than mortgages received then there is net mortgage boot received which may be subject to a gains tax.

Conversely, if mortgages received exceed mortgages given up, the difference is mortgage boot given which adds to the substitute basis of the replacement property.

It is important to structure the payoff and discharge of the mortgages on the taxpayers' relinquished property so that they are not paid off for the benefit of the taxpayer. If the transaction is structured incorrectly, the payoff of mortgages may be interpreted as constituting constructive receipt by the taxpayer which will violate the provisions of Section 1031.

Whenever mortgages are to be paid off in an exchange the taxpayer should hire the services of a qualified exchange intermediary to properly structure the payoff and protect the taxpayer benefits of the exchange.

Answer:

Yes. All real property is considered to be "Like Kind" to all other real property. Personal property, however, is not "Like Kind" with real property and personal property is not "Like Kind" to other personal property excepting personal property of the same "Class" and "Kind".

Since all real property is "Like Kind" a tenant in common interest may be exchanged for a fee simple interest, one property may be exchanged for one or more properties, a duplex may be exchanged for a four plex, a single family house may be exchanged for a motel, and any other combination of real property may be exchanged for other real property.

In order for property to qualify for treatment pursuant to Section 1031 the property must meet two requirements.  The like kind requirement and the purpose requirement.

The purpose requirement mandates that "Like Kind" property must be held by the taxpayer for the productive use in trade or business or for investment. This applies to both the relinquished property and the replacement property.

If either property is held for personal use or for sale, dealer property, then the purpose requirement is not satisfied and the "Like Kind" property will not qualify for treatment under Section 1031.

If the office building is held by the taxpayer for the production of rental income or for use in the taxpayers trade or business, then the office building meets the purpose requirement. If the land, acquired in exchange for the office building, is to be held by the taxpayer for either rental purposes or for farm use by the taxpayer or for growth and appreciation (investment) then the land meets the purpose requirement. Since all real property is "Like Kind" and since the properties in question meet the purpose requirement the properties qualify for 1031 treatment for this taxpayer.

The purpose requirement applies only to the taxpayer seeking relief under Section 1031. It makes no difference how the property is held by any other party.

Answer:

No §1031 is a mandatory code section and not elective.

No. §1031 is a mandatory code section and not elective. If a transaction qualifies for §1031 treatment, it must be reported as an exchange regardless of the recognition of gain or loss.

Answer:

The identification period is 45 days.

The identification period is 45 days. The period begins on the date the taxpayer transfers the relinquished property to the other party in the exchange or the date the qualified intermediary sells the relinquished property. This date is called the initial transfer date.

If there is more than one relinquished property in the same deferred exchange then the initial transfer date is the date the first property is transferred.

The identification period terminates at midnight on the 45 th day following the initial transfer date regardless of holidays or Sundays.

Answer:

Yes. However, there are special rules. In an exchange between related parties both parties to the exchange must hold replacement property received for a minimum of two years. If either party disposes of replacement property prior to the end of two years the exchange will be nullified and both parties will be subject to the recognition of gain effective on the date the replacement property is transferred.

Exception to this special rule are if the transfer takes place after the death of either party, or the transfer is a result of an involuntary or compulsory conversion, or if the IRS is satisfied that neither the original exchange or the subsequent transfer has tax avoidance as its principal purpose.

For the purpose of these special rules, a related person is considered to be a brother, sister, spouse, ancestors, and lineal descendants, a corporation where more than 50% of the stock is held by the related party, a grantor and a fiduciary of a trust, a fiduciary of one trust and a fiduciary of another trust if the same person is the grantor of both trusts, a corporation and another corporation if the taxpayer owns more than 50% of the stock in each corporation and a corporation and a partnership if the taxpayer owns more than 50% of the corporate stock and 50% of the capital or profits interest in the partnership.

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:

Sets a limitation on the number of replacement properties identified.

The 200% rule sets a limitation on the number of replacement properties which may be identified at the termination of the identification period.

The rule states that regardless of the number of relinquished properties transferred by the taxpayer in the same delayed exchange, the maximum number of replacement properties that may be identified must be three properties or less or the fair market value of all identified property must be less than 200% of the fair market value of all relinquished properties.

The exceptions to this rule are the 95% rule and any identified property received by the taxpayer prior to the end of the identification period.

If the taxpayer has identified more property at the end of the identification period than is permitted by both the three property rule and the 200% rule, then the taxpayer is treated as if no replacement property has been identified excepting, any replacement property identified and received by the taxpayer prior to the termination of the identification period shall not be considered in the application of the rules and if the taxpayer receives 95% of the fair market value of all identified property prior to the termination of the exchange period then the rules shall not apply.

Answer:

A limit of the number of identified property at the termination of the identification period.

The three property rule sets a limitation on the number of replacement properties which may be identified at the termination of the identification period.

The rule states that regardless of the number of relinquished properties transferred by the taxpayer in the same delayed exchange, the maximum number of replacement properties that may be identified must be three properties or less if the fair market value of all identified property is greater than 200% of the fair market value of all relinquished properties.

The exceptions to this rule are the 95% rule and any identified property received by the taxpayer prior to the end of the identification period.

If the taxpayer has identified more property at the end of the identification period than is permitted by both the three property rule and the 200% rule, then the taxpayer is treated as if no replacement property has been identified excepting, any replacement property identified and received by the taxpayer prior to the termination of the identification period shall not be considered in the application of the rules and if the taxpayer receives 95% of the fair market value of all identified property prior to the termination of the exchange period then the rules shall not apply.

Answer:

No. Section 1031 provides that the taxpayer having conveyed the relinquished property must take possession of the replacement property on or before midnight on the expiration of 180 days from the initial transfer date. This 180 day limitation does not consider Sundays or holidays and may be limited to the date the taxpayer is required to file a Federal tax return including extensions for the tax year of the exchange. The filing date or 180 days, which ever is sooner shall apply.

The taxpayer should be aware that the receipt, use or enjoyment of any non like kind property prior to the receipt of "Like Kind" property within the 180 day limitation will disqualify the exchange for 1031 treatment and be cause for an immediate taxable event and that the taxpayer must utilize the services of a Qualified Exchange.

Intermediary to avoid the receipt, use or enjoyment of such non like kind property.

"Like Kind" replacement property transferred to the taxpayer after the expiration of the 180 limit or after the filing date, whichever comes first will be deemed to be non "Like Kind" property, boot received and may cause some recognition of gain.

Answer:

Yes. A taxpayer may receive both  "Like Kind" and non like kind property and qualify for 1031 treatment. However, there may be a tax associated with the receipt of the non like kind property.

Gain will be recognized in the year of the exchange to the extent of the fair market value of net non like kind property is received excepting that the recognized gain shall never be greater than the gain which would have been recognized had the relinquished property been sold in a fully taxable sale transaction.

If the taxpayer moves down in value or equity in the exchange then there will be net boot received which will be taxable. If the taxpayer moves up in both value and equity then the exchange will be fully tax deferred.

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:

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.

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.