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. 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. Only property located within the fifty United States and the Virgin Islands.

No. Only property located within the fifty United States and the Virgin Islands will be considered as "Like Kind". Property located outside the United States or Virgin Islands is considered "Boot" and the disposition or receipt of such property in an exchange may cause a taxable event.

In 1989 Congress amended Section 1031 to specifically excluded exchanges into or out of foreign properties. Prior to that time, all real property regardless of location was considered "Like Kind" and qualified for treatment under Section 1031.

This exclusion, however, does not prevent a taxpayer from accomplishing a qualifying exchange for real property located within the United States and receiving or giving foreign property as additional consideration to balance the equities in the exchange. If such is the case, the foreign property received is considered non cash boot received and will, to the extent the boot is less than the realized gain be taxable.

Foreign property given up in an exchange will be taxed as if the foreign property had been sold at the then current fair market value of the foreign property and it may also be subject to a recapture tax on excess depreciation.

Answer:

Yes. One or more relinquished property may be exchanged for one or more replacement property subject to the "Three Property Rule", the "200 Percent Role" and the "95 Percent Rule". These rules place certain limitations on the identification and receipt requirements of replacement property in real property exchanges and should be understood by the exchangor prior to the exchange of multiple "Like Kind" properties.

In the discussion of this question, it will be assumed that all relinquished and replacement properties are real properties. A more complex answer is required for the exchange of multiple personal properties of like kind and like character.

In an exchange of multiple like kind relinquished properties, the initial transfer date (the first day of the identification period and the exchange period) is the date the FIRST relinquished property is transferred by the exchange intermediary to the property buyer.

The three property rule limits the number of properties that may be identified by the exchangor as replacement properties in an exchange to no more than three properties. If the taxpayer meets this rule then the 200% rule and the 95% rule may be disregarded.

If the taxpayer exceeds the three property rule by identifying more than three properties then the aggregate fair market value of all properties identified must not exceed 200% of the aggregate fair market value of all relinquished property.

If the taxpayer fails to meet both the three property rule and the 200% rule but acquires prior to the termination of the exchange period 95% of the fair market value of all property identified prior to the termination of the identification period then both the three property rule and the 200% rule are waived. However, if the taxpayer fails to meet all three rules then it will be deemed that no replacement properties were identified prior to the end of the identification period.

Answer:

Yes. This includes leased land or leased improvements.

Yes. This includes leased land or leased improvements or both as well as vacant property if available for rent or lease at fair market rent. In fact, all real property is considered "Like Kind" except for foreign real property, property outside the United States and the Virgin Islands.

"Like Kind property also includes all other real property excepting foreign property which has never been rented, will never be rented any may only have value in that it holds the earth together. For example, raw undeveloped land is "Like Kind".

Some confusion may exist in that for "Like Kind" real property to qualify for 1031 treatment the property must also be held by the taxpayer for either the productive use in a trade or business or for investment. This applies to both the relinquished property as well as the replacement property. If either property is held by the taxpayer for personal use or for sale then although the property is "Like Kind" it will not qualify for treatment under Section 1031 in the hands of the taxpayer.

All rented or lease real property or property available to let or rent is considered to be held for the productive use in a trade or business. All farms, business, office, retail, industrial and commercial property used by the taxpayer in his trade or business is considered held for the productive use in trade or business, and all property held primarily for appreciation and growth is considered held for investment.

A property may be owned by a taxpayer for both personal use and productive use in a trade or business such as a duplex where the owner resides in one half and rents the other half. If this is the case, both halves of the duplex are "Like Kind" however, only the rental half which is held for the productive use in trade or business qualifies. The half of the duplex used by the taxpayer for his residence does not qualify under Section 1031.

Answer:

In order to answer this question and similar questions.

In order to answer this question and other similar questions, the question might be rewritten as follows; How long should the relinquished property and the replacement property be held by the taxpayer for the productive use in trade or business or for investment to qualify for 1031 treatment.

The code is mute on this question. Conventional wisdom would dictate that the longer the property is rented or made available for rent, held for the productive use in a trade or business or for investment, the more likely it will be considered as qualifying "Like Kind" property.  A generally recognized rule of thumb is that qualifying "Like Kind" property should be held at least one year before and after the exchange. This however is only a rule of thumb.

If the property has recently been converted from dealer or personal use property to rental property the prudent taxpayer my elect to postpone the exchange at least into the next tax year and preferably for at least one full year. However, a case can be made that the one year period is not sufficient by the following example.

Suppose you as the taxpayer have owned a vacation home for the past 15 years and in each of the previous years you have personally used the home for more that 14 days each year.  Because of the extent of your personal use the property is deemed to be personal use property subject to the vacation home limitation provisions of the code and rental expenses in excess of rental income are disallowed. The property during these fifteen years has been personal use property and not property held for the productive use in a trade or business.

Suppose in year 16 you personally use the property for only 7 days and rent the property for 100 days. The property is classified in the 16th year as rental property held for the productive use in trade or business and is eligible for treatment under Section 1031.

However, was the conversion in the 16th year made solely for the avoidance of tax on the disposition  of the property or was the conversion made for valid business reasons without knowledge of the future disposition?  Was the amount of time which elapsed between the time of the conversion and the time of the exchange sufficient to insure that the property had been held for a qualifying purpose?

There is no unique answer to these questions. However, it may logically be assumed that the position of the IRS will be that the time was not sufficient, that in fact the property was personal use property converted solely to avoid a tax and that the property does not qualify for 1031 treatment.

Answer:

Yes. A tenant in common interest in "Like Kind" property is considered "Like Kind" and will qualify for Section 1031 consideration. The percentage interest is not material but your interest in the property must have been held by you for the productive use in trade or business or for investment.

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.