1031 Information Center™

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Topic 1 - Introduction

This topic introduces real estate exchanges and focuses on the deferred exchange and how vital the deferred exchange regulations are in planning and executing real estate exchanges.

Do You Really Want to Make an Exchange?

What is a Like-Kind Exchange

There Must be an Actual Exchange of Properties

Topic 2 - Qualified Property

After recognizing an exchange opportunity, you must determine if the properties involved in the exchange qualify for §1031 treatment. I have seen exchangers go to lots of time and trouble to set up an exchange, only to discover that one or both of the properties did not even qualify. What a waste of time and money. This chapter explains how to avoid this common problem. It teaches how to determine the classification of real estate for §1031 exchange purposes, which classifications qualify, and which don’t. Like-kind property as defined in §1031 is explained and detailed. Other topics include real estate options, foreign real estate, partnerships and time holding considerations.

The Four Classifications of Real Estate

Mixed Classifications

Excluded Property

Held for Productive Use or Held for Investment

Like-Kind Property

Real Estate Options

Not Held for Resale

Time Holding Considerations

Foreign Real Estate

Partnership Interests

Exchanges of Multiple Properties

Exchanges of Multiple Assets

 

Topic 3 - Figuring Boot and Taxable Gain

Before your exchange transaction is triggered, you need to figure how boot and taxable gain (if any) works. This topic explains how to identify and figure the amount of boot in a deferred exchange. It deals with boot problems related to mortgage relief inside the exchange. It also provides special in-depth coverage of how to treat installment sale notes inside the exchange period.

Net Boot Received is Taxable Gain

What Kind of Gain?

Depreciation Recapture

Money and Unlike-Kind Property

Assumption of Liabilities

Figuring Net Mortgage Relief

Mortgage Assumed Less Than Given Up

Mortgage Assumed More Than Given Up

Anticipatory and Post-Exchange Mortgaging

Selling Expenses Paid

Giving Up Unlike-Kind Property

Exchange With Installment Sale Note

Topic 4 - Time Restrictions for Deferred Exchange Transactions

This topic explains how the identification and exchange time restrictions work once you have sold your Relinquished Property. And how to identify the Replacement Property so it qualifies for §1031 exchange treatment. The rules even permit you to exchange for property to be constructed to your plans. Great stuff here for tax planning.

Identification and Exchange Periods

Fraudulently Backdated Documents

Identification - How to Identify

Identification - Property Description

Alternative and Multiple Properties

The 3-Property Rule

The 200 Percent Rule

Incidental Property Disregarded

Revoking the Identification

Receipt of Identified Replacement Property

Replacement Property to be Produced

Topic 5 - Safe Harbors For Deferred Exchangers

How the safe harbors work is critical to planning a successful exchange. In general terms, a safe harbor is an area of protection. The IRS has spelled out certain standards and procedures for taxpayers to meet in real estate exchanges. As long as the exchanger meets these criteria, he will be in a “safe harbor” and not subject to attack by the IRS.

The deferred exchange regulations make explicit four safe harbors you may use to avoid constructive receipt of money or boot. If you use safe-harbor specifications, their use will not be considered in testing to see if you have constructive receipt. That’s why they are called safe harbors. Since the safe harbor rules require the exchanger to use the services of a Qualified Intermediary, a wrong choice can doom your exchange.

The four safe harbors are covered, plus related party exchanges, and example of direct deeding and how to chose the right Qualified Intermediary for your transaction.

Safe Harbor #1 - Qualified Intermediaries

Finding the Right Qualified Intermediary

Safe Harbor #2 - Security and Escrow Agreements

Safe Harbor #3 - Qualified Escrow Accounts and Trusts

Cash Proceeds – Questions and Answers

Safe Harbor #4 - Interest and Other Growth Factors

Comprehensive Example of Direct Deeding

Definition of Related Party for Purposes of Deferred Exchanges

Topic 6 - Reverse Exchanges

 

Topic 7 - Exchanges Involving Installment Sales

Many exchanges involve both like-kind property and boot in the form of an installment sale note. This creates a condition causing both §1031 and §453 (dealing with installment sales) to apply. Topic Six explains the tax treatment of the installment note taken in an exchange and how Treasury Decision 8535 coordinates the safe harbor rules of deferred exchanges with installment sale rules.

Creation of Installment Note Inside Exchange

Treasury Decision 8535

IRS Illustrations

Topic 8 - Primary Residence in a 1031 Exchange

Even though §1031 focuses on like-kind exchanges, the exchange transaction interacts with many other code sections and regulations. Many involve the primary residence. This topic explains the tax considerations that must be taken into account when structuring an exchange involving these properties. It explains how to plan property reclassifications to create great strategies and ideas.

Personal Residence Primer

Section 121 Exclusion of Gain from Sale of Primary Residence

Special Rules

Tax Planning Strategies for the Primary Residence

 

Topic 9 - Problem Considerations When Exchanging Vacation Homes

 

Topic 10 - Figuring Substituted Basis for Replacement Property

Many people are confused when it comes to figuring the tax basis of the Replacement Property acquired in a §1031 exchange. This topic takes you step-by-step and teaches how to figure this basis called substituted basis. Includes figuring basis when boot is paid and received and allocating basis when more than one Replacement Property is received

Substituted Basis

Figuring Basis When Boot is Paid

Figuring Basis When Boot is Received

Property Subject to Mortgage

More Than One Property Received

Topic 11 - Special Issues Related to Real Estate Exchangers

Three doctrines must be considered when structuring an exchange of real estate. One is the Doctrine of Substance over Form, another is the Doctrine of Step Transactions, and the third is the Doctrine of Constructive Receipt. While these doctrines apply to all sections of the Internal Revenue Code, their application to §1031 exchanges can turn many a “non-taxable exchange” into a “taxable sale.”

This topic covers those and other pesky problems that always seem to pop up in an otherwise smooth transaction. Such as transfers between spouses, vacation homes, sale-leasebacks and real estate exchanges involving personal property.

Exchanging Multiple Properties

Transfers Between Spouses

Sale-Leasebacks as Exchanges

Using §1031 to Split Up Partners and Investors in Real Estate

Exchanging Personal Property

Cooperation Clause for Sale of Relinquished Property

Cooperation Clause for Purchase of Replacement Property

Title Considerations

Exceptions to the 2-Year Rule

Like-Kind Exchanges Between Related Persons

Exceptions to the Related Persons Rule

Doctrine of Substance Over Form

Doctrine of Step Transactions