Answer:

No. Partnership interests are specifically excluded from " Like Kind" treatment. A partners exchange of an interest in one partnership may not be exchanged and qualify for 1031 treatment for an interest in another partnership, for ownership in fee simple or any other form of ownership.

Similar provisions apply to a taxpayer's beneficial interest in an estate or trust or to a stock interest in a corporation.

However, this exclusion does not prevent a partnership from exchanging property for other property so long as the additional requirements of Section 1031 are met.

A partner in a partnership who desires the benefits of Section 1031 may want to consider dissolving the partnership and transferring the partnership assets to the individual partners as tenants in common. The tenant in common interest of the individual partner will qualify for exchange and the individual partner may exchange such tenant in common interest for other tenant in common interest or for fee simple.

Suppose a partnership of five equal partners owns an office building and exchanges the office building in a qualifying exchange for five office condominiums. Further suppose that at some time after the exchange, preferably at least one year, the partnership dissolves in a non taxable transaction and deeds the partnership assets in the form of five equal valued condominiums one to each partner.

The basis in the fee simple ownership of a condominium to the individual partner will be the same as the basis the partnership had in that individual condominium. In addition, the individual partner now qualify to exchange his or her interest in the condo.

Answer:

Yes. An installment sale note received in an exchange is considered "Boot" received but the gain associated with the note may be recognized ratably as the installment sale payments are received. Also, the "Like Kind" property received in the exchange will not be considered in the installment sale Contract Price  and the installment sale Gross Profit is reduced by the gain not recognized in the exchange.

In addition, an installment sale note made payable to a qualified intermediary at the time of sale of the relinquished property will not be considered a third party note when assigned by the intermediary to the taxpayer at the termination of the exchange.

The exchangor should be advised to work closely with a Qualified Exchange Intermediary in attempting the combination exchange and installment sale transaction to avoid any possible constructive or actual receipt of relinquished property proceeds which could void the exchange.

Answer:

No. Two party exchanges, although they do occur, are not common due to the practical nature of the transaction. It is seldom that two parties will agree that equity given and received by the parties are of equal value and worth.

Most exchanges involve four parties. They are, the party desiring the exchange (Exchangor), a buyer for the exchangors relinquished property, a seller of the property the exchanger desires to acquire and an exchange intermediary who orchestrates and manages the exchange transaction for the benefit of the exchangor.

Generally the exchangor will locate a buyer for the property he or she desires to dispose of in an exchange. The relinquished property is then deeded by the exchangor in a non taxable transfer to the intermediary who sells the property to the buyer subject to the prior terms of the agreement between the exchangor and the buyer.

The net proceeds from the intermediaries sale of the relinquished property are held by the intermediary for the purchase of replacement property.

Upon receiving instructions from the exchangor, the intermediary will use the sales proceeds from the sale of the relinquished property to acquire replacement property which is subsequently deeded by the intermediary to the exchangor.

Notice that the exchangor has, in fact, accomplished a two party transaction with the intermediary and has not been involved with the other parties to the sale transaction or the purchase transaction by the intermediary.

In fact, the exchangor has met one of the rigid requirements of a successful exchange by giving up property and receiving only property in a reciprocal manner by utilizing the services of the intermediary as a principal who intervened between the exchangor and the sale and purchase portion of the transaction.

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:

A transfer of property held for the productive use in trade or business.

Under the 1991 regulations, a deferred exchange is an exchange in which, pursuant to an agreement, the taxpayer transfers property held for the productive use in trade or business or for investment and subsequently receives property to be held for the productive use in trade or business or for investment, Reg. Section 1.1031(k)‑1(b).

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:

A required document of an Exchange.

The exchange agreement is a required document of an exchange. It is usually an agreement to exchange like kind property made between a qualified exchange intermediary and the taxpayer. It must be in writing and executed by both parties.

The exchange agreement requires that the intermediary must acquire the relinquished property from the taxpayer, transfer it to the buyer, then acquire the replacement property from the seller and transfer it to the taxpayer.

The agreement must expressly limit the taxpayers right or ability to receive, pledge, borrow or otherwise obtain benefits of money or other property held by the intermediary before the end of the exchange period excepting, if the taxpayer has not identified replacement property prior to the termination of the identification period then the taxpayer may have such rights any time after the termination of the identification period, or after the time the taxpayer has received all of the identified property or all replacement property to which the taxpayer is entitled under the agreement, or after the termination of the exchange period or after the end of the identification period if there is an occurrence of a material and substantial contingency which prohibits the exchange and the contingency has been provided for in writing in the agreement and its occurrence is beyond the control of the taxpayer or any disqualified person.

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 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. 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:

The qualified exchange intermediary must not be a disqualified person.

The qualified exchange intermediary must not be a disqualified person as defined in Treasury Regulations Section 1.1031(k), must have a complete understanding of the current regulations, must have the ability to perform in compliance with the exchange agreement and must have a working knowledge of all of the ancillary problems and pitfalls of the exchange transaction.

Answer:

Yes. A corporation or a partnership may exchange property held for the productive use in a trade or business or for investment for property solely in kind to be held for the productive use in a trade or business and qualify for 1031 treatment. The requirement is that the party giving up relinquished property is the same tax reporting entity as the party receiving the replacement property. However, a holder of shares of the corporation or a party holding a partnership interest in the partnership may not exchange the corporate shares or the partnership interest and qualify for 1031 treatment. The code explicitly excludes stocks and partnership interests as being like kind.

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:

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:

Yes. If you always utilize the qualifying tax deferred exchange to dispose of one property and acquire another you will continue to postpone the recognition of gain, the last property acquired will pass to your heirs at a stepped up basis equal to the current fair market value and the heirs may sell the property for cash at the new basis with out recognition of gain.

The tax deferred exchange transaction and the provisions of Section 1031 of the Internal Revenue Code and related regulations allow a taxpayer to preserve 100% of the growth and appreciation in property and to transfer all of the profit into qualifying replacement property without the payment of gains tax.

In order for an exchange to be 100% tax deferred, the fair market value of the replacement property or properties must be equal to or grater than the fair market value of the relinquished property and the taxpayer must use all of his or her equity in the acquisition of the replacement property. This is sometimes called the "equal or greater requirement".

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:

Any person, corporation or partnership.

Any person, corporation or partnership  who is an agent of or who is otherwise related to the taxpayer may not be a Qualified exchange intermediary.

The qualified intermediary is in the business of facilitating deferred exchanges by intermediating between the principals, and by acquiring the relinquished property from the taxpayer and transferring it to the purchaser and then acquiring the replacement property from a seller and transferring it to the taxpayer.

The qualified intermediary must protect the integrity of the form of the exchange agreement between the intermediary and the taxpayer and protect the taxpayer from actual or constructive receipt of money or other property prior to the transfer of replacement property.

A disqualified person is any person who acts as the taxpayers agent, employee, attorney or broker and any brother, sister, spouse, ancestor or lineal descendants. A disqualified person is also any corporation where 10% of the outstanding stock is owned by or for the taxpayer either directly or indirectly or any beneficiary of a trust where the taxpayer is the grantor.

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:

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:

It may be to your best interest to wait.

It may be to your best interest to wait. However, you may still want to consider an exchange after Congress approves a capital gain exclusion.

The answer to this question is relative to the amount of tax liability regardless of rate of tax on capital gains. Furthermore, the answer must be consistent with your investment and business plans. If your plans call for you to dispose of your real estate portfolio, then you may want to hold. However, if it is your intent to retain real estate investment properties in your portfolio, then an exchange is appropriate before as well as after the exclusion is enacted.

Hopefully, Congress in its infinite wisdom will some day realize that a capital gains tax exclusion is not simply a loophole for the wealthy few and that such an exclusion will benefit many taxpayers and help stimulate an investment rich middle class society.

When Congress enacts the exclusion, it is anticipated that the real estate investment industry will answer will significantly increased activity. Many more real estate transactions will close some of which will qualify for non recognition treatment under Section 1031 and some which will be taxable sales. The number of sales will increase but so will the number of exchanges.

You must analyze your investment goals to answer the question relative to your particular situation and circumstances. But do not make the mistake and rule out an exchange. Abide by the old adage, "Take deductions as early as possible and pay taxes as late as possible".

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:

A thorough familiarity an knowledge of the regulations.

The duties, responsibilities and challenges involved with operating a qualified intermediary business are in general a thorough familiarity and knowledge of the regulations, ability to provide documentation in compliance with the regulations, an understanding of all of the elements of the exchange and the knowledge and ability to perform in compliance with the exchange agreement and the regulations.

More specifically, the qualified exchange intermediary must

1. Preserve the integrity of the exchange through preparation of proper documentation and completing the exchange in compliance with the regulations.
2. Making sure the "Safe Harbors", if used, are not violated and therefore cease to apply.
3. Interpreting and applying the regulations to complex transactional issues.
4. Providing proper and accurate accounting to the taxpayer.
5. Being able to respond to short time constraints which are prevalent in deferred exchanges.
6. Managing the exchange funds in a prudent and safe manner which incorporates sound business practices.

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:

§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:

This question may best be answered by looking at some alternative ideas.

This question may best be answered by looking at some alternative real estate investment ideas that are less management intensive.

1. Exchange management intensive property for tipple net leased property.
2. Exchange management intensive property for property you may want to retire to in several years such as a winter home in Florida.
3. Exchange management intensive property for property to rent to your children or grand children. Be sure to rent at current fair market value.
4. Exchange management intensive property for tenant in common ownership with others who will take over management responsibility.
5. Exchange management intensive property for land. You may leave the land unimproved or improve the land with less management intensive improvements concurrent with the exchange or at some future date. Be advised that you may be subject to recapture tax if you were using excelerated depreciation.
6. Exchange your management intensive property for a lease owned by a landlord. Collect the monthly payments from the tenant but do not own the property.
7. Exchange several small management intensive properties for one larger property where management can be hired.

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:

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:

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.

Answer:

Until such time as the taxpayer otherwise disposes of the replacement property in another fully taxable transaction.

If a taxpayer successfully completes an exchange qualifying for Section 1031 treatment, the gain not recognized in the exchange will be postponed until such time as the taxpayer otherwise disposes of the replacement property in another fully taxable transaction. There is no specific time limit and to the extent that the taxpayer never disposes of replacement property the gain may never be recognized.

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. 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:

The gain recognized in an exchange is the lesser of the realized gain or the net boot received.

The gain recognized in an exchange is the lesser of the realized gain or the net boot received. Realized gain is the gain that would be recognized and subject to tax in the year of the exchange if the relinquished property is sold for cash. The net boot received is the sum of the cash boot received plus non cash boot received plus net mortgage relief. The tax liability will not be greater than the tax liability on sale, the tax on the realized gain.

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:

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. An exchange transaction may be subject to a recapture tax on excess depreciation if the depreciable basis in the replacement property is less than the adjusted cost basis for depreciation in the relinquished property. Taxpayers exchanging improved property for land should consider this trap before contemplating the exchange.

If a taxpayer exchanges qualifying "Like Kind" real property and non qualifying personal property for other qualifying "Like Kind" property the conveyance of the non qualifying property is considered a sale of such property which sale may result in the recognition of a taxable gain.

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:

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:

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:

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:

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:

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:

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:

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:

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.