| Under Section 1031 of the Internal Revenue Code, | | | | propertyActual Receipt: When the Exchanger |
| owners of real estate held for investment or use | | | | actually receives the funds from the sale of the |
| in a trade or business can swap their property | | | | Relinquished Property. Receipt of cash by the |
| tax-free for "like-kind" real estate. | | | | Exchanger before he receives the Replacement |
| Exchanges are made for people wanting to stay | | | | Property may be enough to destroy the tax |
| invested in real estate, increase their leverage and | | | | deferred treatment of the transaction.Adjusted |
| to avoid paying hefty taxes upon the sale of | | | | Basis: Generally speaking the adjusted basis is |
| property.Like Kind- Apartments | | | | equal to the purchase price plus capital |
| - Rental Houses | | | | improvements less depreciation. Transactions |
| - Retail Properties | | | | involving exchanges, gifts, probates and receiving |
| - Commercial | | | | property from a trust can have an impact on |
| - Raw Land | | | | calculating the property's adjusted basis. The |
| - Office Buildings | | | | taxpayer's C.P.A. or tax advisor is the party to |
| - Industrial | | | | look to for these types of questions.Boot: Boot is |
| - RanchesNon Qualifying Properties- Personal | | | | any type of property received or given up in an |
| Residences | | | | exchange that does not meet the like kind |
| - Dealer Property | | | | requirement. Generally speaking, receiving boot will |
| - Partnership Interests | | | | trigger the recognition of gain and taxes. If the |
| - InventoryReason to Exchanges- Restoring | | | | Exchanger receives boot, they will be taxed. Boot |
| Depreciation that will soon expire - by exchanging | | | | added or given up by the Exchanger does not |
| one property for anotherof greater value.- To | | | | necessarily trigger a taxable event. In a real |
| upgrade size and/or quality of investment. An | | | | property exchange, boot received is any type of |
| exchange can be utilized to combine the equity of | | | | property received by the exchange which is not |
| one or more properties into a larger singular | | | | real property held for investment or productive |
| investment.- To change investment location. An | | | | use in a trade or business.Cash Boot: Cash Boot |
| exchange can be executed in anticipation of | | | | consists of cash and nonqualifying property. A car, |
| markettrends to maximize appreciation potential.7 | | | | a boat or receipt of the beneficial interest in a |
| Steps for a Successful 1031 Tax Deferred | | | | promissory note are all examples of Cash |
| ExchangeStep 1: Consult with your tax and | | | | Boot.Mortgage Boot: Mortgage Boot consists of |
| financial advisors to determine if a tax deferred | | | | the secured debt given up and received as part |
| exchange is appropriate for your circumstances | | | | of the same exchange. If the exchanger |
| and compatible with your investment goals.Step 2: | | | | increases the amount of debt on the |
| Listing the Relinquished Property for sale with a | | | | Replacement Property verses the Relinquished |
| licensed real estate broker. During the first step | | | | Property, they have given mortgage boot. If the |
| the Exchanger will list the Relinquished Property | | | | exchanger decreases the amount of debt on the |
| with a real estate broker. The broker/agent will | | | | Replacement Property verses the Relinquished |
| disclose the intent to complete an exchange in the | | | | Property, they have received mortgage boot. |
| listing agreement.Step 3: Offer, Counter Offer and | | | | Generally speaking, mortgage boot received |
| Acceptance. The Exchanger enters into a contract | | | | triggers the recognition of gain and it is taxable, |
| with the Buyer for the sale/exchange of the | | | | unless offset by Cash Boot added or given up in |
| Relinquished Property. The broker/agent discloses | | | | the exchange.Constructive Receipt: Even if the |
| the Seller/Exchanger's intent to exchange into the | | | | Exchanger does not actually receive the proceeds |
| Purchase Agreement and Receipt for Deposit.Step | | | | from the disposition of the Relinquished Property, |
| 4: Open escrow for the Relinquished Property and | | | | the exchange will be disallowed if the Exchanger is |
| coordinate with the Facilitator. The Facilitator | | | | treated as having constructively received the |
| prepares the exchange agreement and | | | | funds.Delayed Exchange: Also called |
| coordinates with the escrow holder to close | | | | non-simultaneous, deferred and Starker. A |
| escrow as Phase I of a tax deferred exchange. | | | | delayed exchange is a tax deferred exchange |
| Important: The exchange agreement must be in | | | | where the Replacement Property is Received |
| place and signed by all parties prior to close of | | | | after the transfer of the Relinquished Property. In |
| escrow. Additionally, all earnest money deposits | | | | a delayed exchange the Exchanger must identify |
| should be placed with the title company.Step 5: | | | | all potential Replacement Properties within 45 days |
| Replacement Property Identification. After closing | | | | from the transfer of the Relinquished Property |
| escrow for the sale of the Relinquished Property, | | | | and the Exchanger must Receive all Replacement |
| the Exchanger must identify all Replacement | | | | Properties within 180 days or the due date of the |
| Property within 45 days from day after close of | | | | Exchanger's tax return whichever occurs |
| escrow.Step 6: Contracting for the Replacement | | | | first.Like-Kind Property: Refers to the nature of |
| Property. After closing on the Relinquished | | | | the property the Exchanger gives up or receives |
| Property the Exchanger has 180 days to acquire | | | | as part of the same tax deferred exchange |
| the Replacement Property. With the help of his or | | | | transaction. In order to qualify as like kind the |
| her agent the Exchanger enters into contract to | | | | property given up or received must be held for |
| purchase the Replacement Property from the | | | | productive use in a trade or business or held for |
| Seller. In the contract to purchase the agent | | | | investment to qualify as like-kind.Realized Gain: |
| discloses the Exchanger's intent to complete the | | | | Refers to a gain that is not necessarily taxed. In a |
| exchange and obtains the Seller's cooperation.Step | | | | successful exchange the gain is realized but not |
| 7: Open escrow for the Replacement Property. | | | | recognized and therefore not taxed.Recognized |
| The Facilitator prepares the Phase II Exchange | | | | Gain: Refers to gain which is subject to tax. When |
| Agreement and coordinates with the Replacement | | | | someone disposes of property at a gain or profit |
| Property Escrow holder. The funds held in trust | | | | in a taxable transfer such as a sale, the gain is |
| by the Facilitator are placed in escrow and the | | | | not only realized, but recognized and subject to |
| Replacement Property is purchased by the | | | | tax.Relinquished Property: The property given up |
| Facilitator from the seller. The Facilitator then | | | | by the exchange to start the 1031 exchange |
| transfers the Replacement Property to the | | | | transaction. This property usually passes through |
| Exchanger and the transaction is closed as Phase | | | | an accommodator before transferring to the |
| II of a delayed exchange.Identification of | | | | ultimate Buyer.Reverse Exchange: An exchange |
| Replacement PropertyRegardless of the number | | | | where the Exchange acquires or gains control of |
| of relinquished properties transferred by the | | | | the Replacement Property before disposing of the |
| Exchanger as part of the same exchange, the | | | | Relinquished Property.Simultaneous Exchange: Also |
| maximum number of replacement properties that | | | | referred to as a concurrent exchange. A |
| the Exchanger can identify is as follows:3 Property | | | | simultaneous exchange is an exchange transaction |
| Rule: Three properties without regard to the fair | | | | where the Exchanger transfers out of the |
| market values of the replacement | | | | Relinquished Property and Receives the |
| properties.Or200 Percent Rule: Any number of | | | | Replacement Property at the same time.Transfer |
| properties as long as their aggregate fair market | | | | Tax: A tax usually assessed by a city or county |
| value as of the end of the identification period | | | | on the transfer of property. It may be based on |
| does not exceed 200 percent of the aggregate | | | | equity or value. When structuring a multi-party |
| fair market value of all the relinquished properties | | | | exchange an exchange agreement will usually call |
| as of the date the relinquished properties were | | | | for direct deeding to eliminate additional transfer |
| transferred by the Exchanger.Exception95 Percent | | | | tax.April 15thA taxpayer must identify |
| Rule: Any number of replacement properties | | | | replacement property within 45 days after the |
| identified before the end of the identification | | | | transfer of the relinquished property, and acquire |
| period and received before the end of the | | | | the replacement property within the earlier of 180 |
| exchange period, but only if the Exchanger | | | | days of the relinquished property closing, or the |
| receives before the end of the exchange period | | | | due date of the taxpayer's tax return. |
| identified replacement property the fair market | | | | This means that 1031 escrows that close after |
| value of which is at least 95 percent of the | | | | Oct. 18 will not have the full 180 days to acquire |
| aggregate fair market value of all identified | | | | the replacement property unless the taxpayer |
| replacement properties.Glossary of | | | | files an extension.Contact your CPA or tax |
| TermsAccommodator: A principal involved in the | | | | attorney for advise.By Neda Dabestani-Ryba |
| exchange transaction who agrees to assist the | | | | Prudential Carruthers REALTORSNeda |
| exchanger to effect a tax-deferred exchange. | | | | Dabestani-Ryba is a licensed Realtor in Maryland. |
| Same as Facilitator or | | | | She is a member of the President's Circle of Top |
| intermediary.Accommodating Party: In an | | | | Real Estate Professionals. She can be reached at |
| exchange of properties there is always a person | | | | (800) 536-3806 or visit her website for more |
| or entity that steps in to accommodate or | | | | information: |
| facilitate the exchange transaction. Depending on | | | | Prudential Carruthers REALTORS is an |
| how the transaction is structured, the | | | | independently owned and operated member of |
| accommodating party may incur additional liability | | | | Prudential Real Estate Affiliates, Inc., a Prudential |
| in their efforts to assist in the | | | | Financial company. |
| exchange.Acquisition Property: Replacement | | | | |