Turn to the Experts
ur Mission
is simple
To provide our clients the
best IRC §1031 exchange
consulting, expert service and
unparalleled nancial security.
Table of Contents
The Old Republic AdvAnTAge
OReXcO is wiTh yOu eveRy sTep Of The wAy
like-kind pROpeRTy—A wORld Of
ReAl pOssibiliTies
OReXcO gives yOu fOuR wAys TO eXchAnge
The Delayed Exchange
The Reverse Exchange
The Simultaneous Exchange
The Improvement Exchange
The peRsOnAl pROpeRTy eXchAnge
dOn’T sell yOuR invesTmenT pROpeRTy
unTil yOu dO The mATh
The Capital Gains Calculator
100% Deferral
Determining Proper Vesting
Exchange Contract Addenda
AnsweRs TO yOuR quesTiOns
glOssARy Of TeRms
OReXcO—yOuR nATiOnAl
1031 eXchAnge eXpeRTs
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Your
peAce Of mind
e Old Republic Advantage – Strength in Numbers
When you choose OREXCO® (Old Republic Exchange Facilitator
Company
TM
), a wholly-owned subsidiary of one of the nation’s premier title
insurers, the Old Republic Title Insurance Group (ORTIG), you have the
condence of knowing our nancial strength preserves the integrity and
security of your transaction. OREXCO is a member of the ORTIG, which
is a wholly-owned subsidiary of Old Republic International (NYSE: ORI),
a multi-billion dollar corporation, which ranks among the nation’s 50 largest
publicly-held insurance organizations. Every year since 1992, the ORTIG
has received the highest overall nancial strength ratings in the title insurance
industry from the major ratings agencies.
Personal and Professional Service
Our knowledgeable and professional sta of attorneys and Certied Exchange
Specialists understand your individual needs in the IRC §1031 property
exchange process and will assist you with each step in that process. When
necessary, OREXCO provides complete and concise exchange documentation
within hours.
e Industry Leader
OREXCO has facilitated thousands of 1031 transactions. We are the
unparalleled leader in the exchange business. Our national team consists of
qualied, experienced professionals who will assist you in structuring and
managing your transaction — be it the simple delayed or simultaneous
exchange, or the complicated reverse, build-to-suit or multi-site commercial
transaction. OREXCO is your national 1031 exchange services solution.
Added Security for
your Exchange:
• $80 million in delity bond
• $50 million errors &
omissions insurance
• Letter of Guaranty from
corporate parent
Your rst and last concern in a 1031 exchange transaction should be security
and integrity. Are your funds secure and will your transaction be processed
accurately are the two most important questions you should pose to the Qualied
Intermediary (“QI”) handling your exchange transaction. Unfortunately, there
are no federal regulations for the QI industry. And, because it is fairly easy to
become a QI, it is imperative that you place your exchange funds with a QI that
will protect your assets.
*Members of the Old Republic Title Insurance Group, Inc., are: Old Republic National Title Insurance Company,
Mississippi Valley Title Insurance Company and American Guaranty Title Insurance Company.
OREXCO
Is with You
eveRy sTep Of The wAy
What is a 1031 Exchange?
e Internal Revenue Code provides that a taxpayer may sell an asset (personal
property or real property) and defer payment of capital gains tax, if that taxpayer uses
the proceeds to acquire a like-kind replacement asset.
IRC §1031 provides that neither gain nor loss is recognized if property held for investment
or productive use in trade of business is exchanged for property held for investment or
productive use in a trade or business.
Why Exchange?
• Capital gains tax is signicant;
• Reinvestment into replacement property allows taxpayer to leverage dollars that would
otherwise be spent on taxes;
• Allows for non-income producing property to be replaced with income-producing
property; and
• Allows taxpayer to diversify portfolio and minimize risk.
What We Do
• Act as Qualied Intermediary (QI), as required by the Treasury Regulations;
• Prepare all documents required for the exchange;
• Consult with your tax advisor;
• Execute closing documents;
• Hold the exchange proceeds to avoid constructive receipt of funds; and
• Coordinate with the closing agents, real estate professional, and tax and legal advisors.
Always consult with your tax advisors. eir advice is essential to a successful tax-deferred exchange. Your tax
professional will establish values, allocate sales and purchase price, and recommend the appropriate structure
for your transaction. OREXCO does not provide tax or legal advice.
L-K
A wORld Of ReAl pOssibiliTies
e fundamental advantages of a tax-deferred exchange may be utilized to diversify, consolidate or leverage
your investment portfolio. With respect to real property, the broad denition of like-kind provides
investors with numerous options to accomplish their investment goals.
3 Requirements to Defer Capital Gains Tax
Under Section 1031:
(1) e property disposed of and the property received must be held for productive use in
a trade or business or for investment.
Property held primarily for sale does not qualify. An example of this is inventory or
property held for sale to customers in the ordinary course of the taxpayer’s trade or
business. Likewise, real property held for sale to customers in the ordinary course of a
trade or business is commonly referred to as “dealer property”.
(2) e property disposed of and the property received must be of “like-kind” – the “like-kind”
requirement is dierent for personal property than it is for real property.
Like-Kind Real Property. Like-kind does not mean that the property sold and the property
acquired must share the same physical characteristics. Instead, “like-kind” simply refers
to the requirement that property “held for investment or for productive use in a trade or
business” must be exchanged for other property that also is “held for investment or for
productive use in a trade or business”. In other words, an apartment building need not
be exchanged for another apartment building. It can be exchanged for raw land, a farm, a
duplex, retail property, industrial property, a perpetual conservation easement, a leasehold of
30 years or more, etc.
Like-Kind Personal Property. For personal property assets to qualify as like-kind, the assets
must be in either the same General Asset Class or the same Product Class. If there is no
applicable General Asset Class and no applicable Product Class, the assets must be of the
same nature or character to be considered like-kind (see page 5 for methods of exchanging).
(3) ere must be an “exchange” as distinguished from a “purchase and sale”.
A sale of property and a reinvestment of the proceeds into another property will not qualify as
an exchange under section 1031. e essence of a sale is the receipt of cash for property;
whereas the essence of an exchange is the transfer of property between owners, where each party
to the exchange gives up a property interest in return for a new or additional property interest.
ere are four methods of exchanging: simultaneous exchange, delayed exchange, reverse
exchange and construction/improvement exchange (see page 5 for methods of exchanging).
Examples of Like-Kind Real Property
• Commercial building for a ranch or farm
• A leasehold interest of 30 years or more for a fee interest
• Rental house for farmland
• Improved real property for unimproved real property
• Conservation easement in one farm for fee interest in
another farm
• A utility easement for a utility easement
Examples of Like-Kind Personal Property
• Backhoe for bulldozer (NAICS Product class 333120)
• Crane for tractor (NAICS Product Class 33120)
• Grader for snowplow (NAICS Products Class 333120)
• A computer for a printer (asset class 00.12)
• Airplane for helicopter (asset class 00.21)
• A novel copyright for another novel copyright (same
nature and character)
O
Gives You
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STEP TWO: Identication of the Replacement Property: e
exchanger must identify a replacement property within 45
calendar days after the close of the relinquished property. e
identication is proper only if the replacement property is
designated as a replacement property in a written document
signed by the exchanger and hand-delivered, mailed,
telecopied or otherwise sent to the person obligated to
transfer the replacement property to the exchanger (i.e. the
seller of the replacement property) or to any other person
involved in the exchange (such as the QI), other than the
exchanger or a disqualied person. ree identication rules
apply, which limit the number of properties the exchanger
may identify:
3-PROPERTY RULE: ree properties, no matter what
the fair market value; or
200-PERCENT RULE: Any number of properties, as
long as the aggregate fair market value does not exceed
200% (2x) of the fair market value of all the relinquished
properties; or
95-PERCENT RULE: Any number of properties with-
out regard to value—provided 95% of the value of the
identied properties is acquired.
STEP THREE: Purchase of Replacement Property: Within
180 calendar days after the sale of the relinquished
property or the exchanger’s tax ling date, whichever
is earlier, the exchanger must acquire a like-kind
replacement property. e property acquired must be
one or more of the previously identied replacement
properties. e exchanger again assigns the purchase
and sale contract to OREXCO, which purchases the
replacement property with the exchange proceeds and
causes the seller to deed the replacement property
direct to the exchanger.
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1. e Delayed Exchange e most commonly
utilized tax-planning strategy available to investors is the
delayed exchange. A delayed exchange results when there is
a delay between the sale of the relinquished property and
the purchase of the replacement property. [A delayed
exchange is also referred to as a “Starker exchange”
because of the landmark 1979 federal case entitled Starker
v. U.S., 602 F2d 1341 (9th Cir. 1979), wherein the
court substantiated the validity of the delayed exchange
process. Prior to the Starker case, §1031 of the Internal
Revenue Code authorized tax-free exchanges of real and
personal property.] ereafter, Congress in the 1984 Tax
Reform Act, adopted subsection 1031 (a)(3), which created
the 45-day identication period and the 180-day exchange
period. Finally, on April 25, 1991; the IRS promulgated the
nal regulations under section 1.1031(a)-1, et. seq., which
provide specic rules for deferred like-kind exchanges.
e delayed exchange provides investors up to 180 days
to purchase a replacement property after the relinquished
property is sold. e use of a QI or other safe harbor
is required to facilitate a valid delayed exchange. e
delayed exchange occurs in three fundamental steps:
STEP ONE: Sale of the Relinquished Property: Before
closing on the sale of the relinquished property, the
exchanger retains a QI, such as OREXCO. OREXCO
prepares an exchange agreement, an assignment of the
sales contract and the closing instructions to the escrow-
closing agent. OREXCO instructs the escrow/closing agent
to deed the relinquished property direct to the buyer
and to deliver sales proceeds directly to OREXCO—
thereby preventing the exchanger from having actual or
constructive receipt of the funds. Once the funds are
delivered to OREXCO, access to the funds is restricted
for the remainder of the exchange period. IRC §1031
provides strict rules pertaining to the release of funds to
the exchanger, even when the exchanger decides not to
proceed with the exchange.
delayed exchange timeline
0 Days 45 Days 180 Days
Close of End of Identication Close of
Relinquished Property Period Replacement Property
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ways to exchange
2
(B) Exchange First, aka “Park Title” to the Relinquished
Property. In this parking arrangement, the QI sells
the relinquished property to the EAT. e EAT then
purchases the relinquished property with the funds
loaned from the exchanger. Concurrent therewith, the
QI uses the proceeds to purchase the replacement
property and causes the seller to convey title directly to
the exchanger. us, the exchange occurs at the beginning
of the transaction. ereafter, the EAT continues to
hold title to the relinquished property until the exchanger
nds a buyer. After a buyer is found, the EAT sells the
relinquished property to the buyer and uses the proceeds to
repay its loan from the exchanger.
In either scenario, the EAT will enter into a management
agreement and a lease with the exchanger, in order
to allow the exchanger management responsibilities
over the property for the duration of the parking
period. Additionally, the EAT will require hazard and
liability insurance during the holding period. And, in a
transaction involving nancing, the EAT may become
the borrower under a non-recourse loan. Upon the
expiration of the exchange period or the sale of the
replacement property to the exchanger, the exchanger
assumes the loan.
Timeline: No later than ve business days after the EAT
acquires its ownership interest in the parked property, the
EAT and the exchanger must enter into a written Qualied
Exchange Accommodation Agreement (QEAA). If it is the
replacement property that is parked, the exchanger then
has 45 days to identify one or more relinquished properties.
Written identication of the relinquished properties must
be delivered to the EAT or to another party involved in the
exchange. e exchange must be completed within 180
days (i.e., relinquished property must be conveyed to third-
party buyer and replacement property must be conveyed to
the exchanger), after the EAT’s acquisition of title.
2. e Reverse Exchange A reverse exchange
results when the replacement property is acquired prior
to the sale of the relinquished property. e IRS formally
acknowledged reverse exchanges eective September 15,
2000 (see Rev. Proc. 2000-37). With the help of a QI,
the exchanger utilizes an Exchange Accommodation
Titleholder (EAT) to purchase either the relinquished
property or the replacement property. As with delayed
exchanges, the reverse exchange must be completed
within 180 days.
TWO DIFFERENT PARKING METHODS FOR
REVERSE EXCHANGES:
(A) Exchange Last, aka “Park Title” to the Replacement
Property. In this parking arrangement, the EAT acquires
title to the replacement property with funds loaned by
the exchanger. e EAT then holds that property until the
exchanger nds a buyer for the relinquished property.
After a buyer is found, the QI sells the relinquished
property to the buyer and uses the exchange proceeds to
purchase the replacement property from the EAT. e
EAT uses the sale proceeds to repay the loan from the
exchanger. us, the exchange occurs at the end of the
transaction.
reverse exchange timeline
0 Days 45 Days 180 Days
Title acquired End of Identication Close of Relinquished Property
by EAT Period to buyer
title to the Replacement property and park title while
the improvements are being made. e EAT uses the
exchange proceeds to acquire the replacement property
and pay for the identied improvements. Within
180 calendar days after the sale of the relinquished
property or the exchanger’s tax ling date, whichever is
earlier, the exchanger must acquire the newly improved
replacement property. It is critical that the exchanger
receives property that is substantially the same as the
improvements and property identied. Additionally,
only proceeds spent on improvements that are
substantially complete within the exchange period will
qualify for non-recognition.
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3. e Simultaneous Exchange
A simultaneous exchange occurs when the relinquished
and replacement properties close at the same time. e use,
however, of a QI, such as OREXCO, is still required and
assures the exchanger that he does not have constructive
receipt of his funds, thus ensuring the preservation of safe
harbor treatment under the Treasury Regulations.
4. e Improvement Exchange
An improvement, construction or build-to-suit
exchange occurs when the exchanger wishes to use
exchange proceeds to make capital improvements to the
replacement property. However, improvements made to
land already owned by the exchanger will not qualify as
like-kind replacement property. Additionally, exchange
proceeds cannot be used to pre-pay for improvements
to be made after the exchange. Because of these rules,
exchangers are required to use an accommodation
parking structure – as used in reverse exchanges – and as
permitted under Revenue Procedure 2000-37 whereby
an EAT acquires the replacement property and holds
title while the improvements are made.
e improvement exchange can occur in the context
of a delayed or reverse exchange. In the context of
delayed exchange, the exchanger sells the relinquished
property using a QI. e exchanger has 45 days after
the closing to identify both the replacement property
and the improvements to be made. e identication
requirement is satised if a legal description is
provided for the underlying land and as many details
as practical are provided regarding construction of the
improvements when the identication is made. e
exchanger enters into a purchase and sale agreement to
acquire the replacement property along with a QEAA
with an Exchange Accommodation Titleholder. e
Exchange Accommodation Titleholder agrees to acquire
e Personal
Property
EXCHANGE
A IRC §1031 tax-deferred exchange allows taxpayers to
defer capital gains taxes on the disposition of personal
property assets, such as aircraft, automobiles and trucks,
and agricultural and construction equipment.
Like-Kind Requirement
To qualify as like-kind, personal property assets must be
in either the same General Asset Class, the same Product
Class or the same nature of character.
13 General Asset Classes:
e Treasury Regulations governing §1031 exchanges
specify the following clauses:
• Ofce furniture, xtures and equipment
• Information systems (computers and peripheral
equipment)
• Data-handling equipment, except computers
• Airplanes, except those used commercially
and helicopters
• Automobiles and taxis
• Buses
• Light general purpose trucks
• Heavy general purpose trucks
• Railroad cars and locomotives, except those owned
by railroad transportation companies
• Tractor units for use over-the-road
• Trailers and trailer-mounted containers
• Vessels, barges, tugs and similar water-transportation
equipment, except those used in marine construction
• Industrial steam and electric generation and/or
distribution systems
Product Classes
If assets do not fall within any of the 13 General Asset
Classes, they may be like-kind if they are within the
same Product Class established by the North American
Industrial Code System (NAICS), the industry
classication system used by statistical agencies of the
United States. For NAICS codes, go to
www.census.gov/eos/www/naics.
Same Nature and Character
If there is no applicable General Asset Class and Product
Class, the assets must be of the same nature or character
to be considered like-kind.
Non-Depreciable Assets
Non-depreciable tangible property, such as art, coins
and other valuable collectibles and non-depreciable
intangible personal property – like copyrights and
franchise agreements – are eligible for tax deferral when
exchanged for like-kind property, i.e., property of the
same nature and character.
Personal Property Ineligible for Tax Deferral
Under IRC §1031, any gain from the sale of the following
types of property is not eligible for tax deferral:
• Stock in trade or other property held primarily for sale
• Stocks, bonds or notes
• Other securities or evidence of indebtedness or
interest
• Interest in a partnership
• Certicates of trust or benecial interests
• Choses in action
• Goodwill or going concern
Examples of Like-Kind Personal Property
• Backhoe for a bulldozer (NAICS Product Class 333120)
• Crane for a tractor (NAICS Products Class 33120)
• Grader for a snowplow (NAICS Product Class 33120)
• Farm tractor for cotton baler (NAICS Product Class
333111)
• Harvesting machinery for haying machines (NAICS
Product Class 333111)
• Airplane for a helicopter (Asset Class 00.21)
• A computer for a printer (Asset Class 11.12)
• A novel copyright for another novel copyright (same
nature and character)
Livestock special rule: Livestock must be of the same sex
to be considered like-kind.
Intangible personal property—special rule: e
determination of whether intangible personal property is
like-kind to other intangible personal property depends
on (i) the nature or character of the rights involved (e.g. a
patent or a copyright) and (ii) the nature or character of
the underlying property to which the intangible personal
property relates (e.g. a novel or a song).
OREXCO does not provide tax or legal advice. Consult with your tax advisor to determine whether an exchange is appropriate
for your circumstances.
dOn’T sell yOuR incOme OR invesTmenT pROpeRTy
Until You
Do the Math
Taxes are paid on capital gain, not equity or prot. It is
possible to sell property without realizing much prot and still
owe substantial capital gains tax. Capital gain is simply the
dierence between the sales price and the adjusted basis (i.e.,
what you paid for the property, plus amounts spent on capital
improvements, less depreciation taken), less any closing costs
associated with the sale.
To calculate your estimated capital gain: First, subtract
the adjusted basis from the sales price. Next, subtract
the customary closing costs of your transaction, such as
commission, fees, transfer tax, etc. Finally, multiply the
capital gain by your combined tax rates (federal and state)
to determine your estimated capital gain tax.
1. Calculate Net-Adjusted Basis:
Original Purchase Price
Plus Capital Improvements
Minus Depreciation Taken
Equals Adjusted Basis
2. Calculate Capital Gain:
Current Sales Price
Minus Customary Closing Costs
Minus Adjusted Basis
Equals Capital Gain
3. Calculate Capital Gain Tax:
Gain Attributable to Depreciation
($175,000 x 25% = depreciation)
Plus Federal Capital Gain Tax
($320,000-$175,000 = $145,000 x 20%)
Plus State Capital Gain Tax
(e.g. CA approx. 10% x $320,000 [cap. Gain])
Plus 3.8% Surtax*
(3.8% x $320,000)
=Combined Tax Due
( )
( )
( )
Example
$400,000
$25,000
($175,000)
$250,000
$600,000
($30,000)
($250,000)
$320,000
$43,750
$29,000
$32,000
$12,160
$116,910
e formula set forth above is provided to help you determine your approximate gain and the sums that you may wish to defer through
your exchange transaction. Consult with your tax advisor to determine the correct values and whether an exchange is appropriate for
your circumstances. OREXCO does not provide tax or legal advice.
* If your modied adjusted gross income (MAGI) is equal to or less than the threshold amounts specied in IRC 1411, you will not be subject to the 3.8%
tax. If your MAGI is above the specied threshold amounts, you will pay 3.8% tax on either your investment income or the excess MAGI over the specied
threshold, whichever amount is less.
Filing status reshold amount
Married ling jointly $250,000
Married ling separately $125,000
All other individual taxpayers $200,000
Trusts and Estates $11,650 (for 2012)
100% Deferral—to fully defer state and federal capital gains taxes, the exchanger must reinvest all exchange
proceeds and either acquire property with equal or greater debt, or reinvest additional cash equal to the debt
relief. e following worksheet is a useful tool for determining the amount of cash and debt that should go into
the replacement property.
RELINQUISHED PROPERTY Example
Sale Price: $400,000
Minus Existing Loans: $150,000
Minus Exchange Expenses: $25,000
Equals Net Proceeds: $225,000
ReplAcemenT pROpeRTy Example
Purchase Price: $600,000
Minus New Loans: $375,000
Equals Minimum Down: $225,000
Your minimum down payment for the replacement property should be equal to or greater than the net proceeds from
the sale of your relinquished property, otherwise, you may have boot in the form of cash.
Determining the Proper Vesting
e taxpayer who disposes of the relinquished property
must be the same taxpayer who acquires title to the
replacement property. Problems arise when title to the
relinquished property is held dierently than title to the
replacement property. For example, a husband and wife
dispose of property and acquire new property to which
only the husband is on the title. Or, partnership ABC
disposes of property and partner A individually acquires
replacement property with the title in A’s individual name.
Or, ABC Irrevocable Trust disposes of property and A
acquires the title to the replacement property individually.
e following scenarios are disallowed:
• Husband relinquishes, and husband and wife
acquire property of equal value.
• ABC Corporation relinquishes and XYZ Corporation
acquires.
• ABC Partnership relinquishes and partners acquire
as individuals.
• ABC Partnership relinquishes and XYZ Partnership
acquires.
• Multi-member LLC relinquishes and members
acquire as individuals.
• ABC multi-member LLC relinquishes and XYZ
multi-member LLC acquires.
Exceptions to the “same vesting” rule: e replacement
property may be acquired by a “disregarded entity” that
is wholly-owned by the taxpayer who disposed of the
relinquished property. is is because a disregarded entity is
ignored for federal tax purposes. Instead, the owner of the
entity is deemed the taxpayer for federal tax purposes.
Examples of disregarded entities include:
• A LLC with one owner that does not
elect to be classied as a corporation;
• A revocable living trust;
• An Illinois land trust;
• A Delaware Statutory Trusts (under
certain circumstances - See Rev. Ruling 2004-86)
Examples of scenarios which are allowed using
dierent entities:
• Individual relinquishes and an LLC, which individual is
sole member of, completes the acquisition.
• Husband and wife are trustees of a revocable living
trust, which is a true pass-through trust; relinquish, and
husband and wife acquire as individuals.
• Single-member LLC relinquishes and sole member
acquires as an individual.
• Individual relinquishes and individual’s estate acquires
due to the death of the individual.
e Exchange Contract Addenda
When exchanging, insert this language into your purchase
and sale contract or call OREXCO for a personalized
exchange contract addendum:
CONTRACT FOR THE SALE OF RELINQUISHED
PROPERTY
Buyer acknowledges that it is the intention of Seller to eect an
IRC §1031 tax-deferred exchange, which will neither delay
the closing, nor cause additional expense or liability to the
Buyer. Buyer further acknowledges that Seller’s rights but not its
obligations under this agreement may be assigned to OREXCO,
a QI, to facilitate the exchange. Buyer agrees to cooperate with
Seller and OREXCO to enable Seller to complete the exchange.
CONTRACT FOR THE ACQUISITION OF
REPLACEMENT PROPERTY
Seller acknowledges that it is the intention of Buyer to complete
an IRC §1031 tax-deferred exchange, which will neither delay
the closing nor cause additional expense to Seller. Seller further
acknowledges that Buyer’s rights but not its obligations under
this agreement may be assigned to OREXCO, a QI, for the
purpose of completing the exchange. Seller agrees to cooperate
with Buyer and OREXCO in a manner necessary to enable
Buyer to complete this exchange.
OREXCO does not provide tax or legal advice. Consult with your tax advisor to
determine whether or not an exchange is appropriate for your circumstances.
?
Answers
TO yOuR quesTiOns
What does the term 1031 refer to? 1031 is the number assigned
to the Internal Revenue Code Section that provides for the tax-
deferred exchange of real and personal property.
What are “safe harbors”? is term refers to the rules established
by the 1991 Treasury Regulations for tax-deferred exchanges, which
provide that, if followed, the IRS will allow the exchange to qualify.
What is a Qualied Intermediary (QI)? An individual or
business entity that provides the following functions/services in a
1031 exchange: (1) acquires the relinquished property from the
exchanger and causes it to be transferred to the buyer; (2) holds
the exchange proceeds to avoid exchanger’s actual or constructive
receipt of funds; and (3) acquires the replacement property and
causes it to be transferred to the exchanger.
Why use a QI? Use of a QI is sanctioned as a safe harbor by the IRS.
What is Like-Kind? “Like-Kind” does not mean that the property
sold and the property acquired must share the same physical
characteristics. In other words, an apartment building need not be
exchanged for another apartment building. It can be exchanged for:
raw land, a farm, a duplex, rental property, industrial property, a
perpetual conservation easement, a leasehold of 30 years or more, etc.
Instead, “Like-Kind” simply refers to the requirement that property
that is “held for investment or for productive use in a trade or
business” must be exchanged for other property that also is “held
for investment or for productive use in a trade or business.”
How do I properly identify my replacement property? Property
that is intended as replacement property must be unambiguously
described in a written document signed by the exchanger and sent
to the QI or any other person “involved in the exchange”, other
than the exchanger or a disqualied person under Treasury
Regulation 1.1031(k)-1(k).
e exchanger must identify the replacement property on or before
the 45th calendar day* after the transfer of the relinquished property.
e taxpayer has the burden of proof to show timely and proper
identication. Backdating documents or otherwise dishonestly
alleging that a proper identication was made may result in federal/
civil and/or criminal penalties and nes. See IRC §§7201, 7207.
See also Dobrich v. Commissioner (9th Cir 1999) 188 F3d 512,
wherein the 9th circuit armed the Tax Court’s penalty of 75
percent of the underpayment of taxes against the taxpayer, who
backdated documents to make it appear that he had timely identied
replacement property. e taxpayer paid over $1,000,000 in back
taxes, plus a $774,307 civil fraud penalty for his eorts.
e Treasury Regulations do not permit exchange proceeds to be
used to purchase property that has not been properly identied.
What are the exchange deadlines?
Identication period: e 45 calendar day* period within
which the exchanger must identify – in writing – properties they
intend to purchase as replacement property in the exchange.
e identication must be sent to the QI or any other person
involved in the exchange other than the exchanger or a disqualied
person under Treasury Regulation 1.1031(k)-1(k) on or before 45
calendar days* after the transfer of the relinquished property. e
property or properties listed on the identication notice must be
unambiguously described by a legal description, street address or
distinguishable name and the written identication notice must
signed by the exchanger.
Exchange period: e period within which the exchanger
must complete the acquisition of the identied replacement
property(ies). is period ends the earlier of 180th calendar day*
after the transfer of the relinquished property or the due date of
the exchanger’s tax return for the year in which the relinquished
property was transferred.
Is there any way to get an extension on the 45 calendar day*
or 180 calendar day* deadlines? No extensions are allowed on
the 45 calendar day* deadline with respect to the exchange period.
However, if the 180 exchange period is cut short by the earlier
occurrence of your tax ling date, you may le for an extension,
in order to get the full 180 calendar day* exchange period.
What is Boot? Broadly dened, boot is anything given or received
by the taxpayer that is not like-kind or does not qualify under
section 1031. Boot may be in the form of cash or a promissory
note (i.e., cash boot), or it may be in the form of debt (i.e.,
mortgage boot). Any boot received by the taxpayer in connection
with the disposition of the relinquished property which is not
oset by boot given on the acquisition of the replacement property,
is gain that must be recognized, i.e., taxed. us, it is important to
understand the boot-netting rules.
Boot-netting rules:
1. Cash paid on the acquisition of the replacement property osets
cash received on the disposition of relinquished property;
2. Cash paid on the acquisition of replacement property osets
debt relief on the disposition of relinquished property; and
3. Debt acquired/assumed on the replacement property osets
debt relief on the disposition of relinquished property.
Caveat: Debt assumed on the acquisition of the replacement
property will NOT oset cash received on the disposition of the
relinquished property.
If I own a property with another investor, can I exchange my
interest if s/he doesn’t want to? Yes. You should clearly allocate
each investor’s interest in the property before you sell. e investor
who wishes to exchange may do so and the other investor may
receive cash (taxable). It is, however, very important that the
investors be clear on their intentions before entering into an
exchange agreement with a QI.
What is a partial tax exchange? If the equity on your investment
property is $150,000, and you want to use only $100,000 to
purchase your replacement property and take $50,000 out to buy a
new car, you will have a partially tax-deferred exchange. e $50,000
cash you took to purchase the car is considered taxable cash boot.
May I take out my basis and reinvest only the gain?
No. Both basis and gain must be reinvested to defer taxes. e IRS
does not allow you to allocate a portion of the money as basis and
a portion as gain. Any money received by the exchanger will be
considered boot and taxed at capital gain rate.
*If the 45th or 180th calendar day ends on a weekend or holiday, no extension
of the time frame to the next business day is allowed under any circumstances
What is the exchange value of the property? Simply
stated, the exchange value is your sales price, less your
closing costs. e exchanger is responsible for reinvesting
the exchange value (i.e., the cash and loan amount) when
they purchase the replacement property. (See section on
boot.)
How is a seller carry-back note handled in an
exchange? e note and deed of trust must be drawn
in the QI’s name. During the exchange period, the
note must be converted to cash, which is then added
to the exchange proceeds to be applied to the purchase
of the replacement property in one of the following
three ways:
1. Sell the note to a third party for cash that is then
added to the exchange proceeds; or
2. Obtain the agreement of the replacement property
seller to accept the note as part of the purchase price
of the replacement property; or
3. Accept only a short-term note that will be paid in full
prior to the acquisition of the replacement property.
I own a piece of property that includes my primary
residence and a rental unit. Would it still qualify for
an exchange? Yes, so long as you remain consistent with
your past tax returns. Consult with your tax advisor
to determine the percentage value of the property you
have attributed to investment. You may exchange that
portion of the value. See Revenue Procedure 2005-14 for
guidance.
Can I defer capital gains tax when I sell my primary
residence? No. However, you can exclude up to
$250,000 of gain from taxation (or $500,000, if you are
married) under IRC §121.
Caveat: If you originally acquired your residence as
investment property, you must have owned it for a total
of ve years and you must have resided in it for at least
two of the last ve years, in order to take advantage of the
$250,000/$500,000 exclusion.
Further, the normal $250,000 or $500,000 amount will
be reduced based upon the prorated amount of time the
property was used for investment purposes.
If I sell an investment property that I previously used
as a principal residence, can I exclude gain under
the §121 primary residence exclusion and defer
investment gain under §1031? Yes. Revenue Procedure
2005-14 establishes the following rules for applying both
sections:
1. §121 applied before §1031; and
2. Gain from depreciation may not be excluded under
§121, but can be deferred under §1031; and
3. Boot will be taxed, but only to the extent it exceeds
the §121 exclusion.
Can I exchange with a related party? You can exchange
with a related party subject to certain restrictions. If you
buy your replacement property from a related party or
swap with a related party, the related party also must do
an exchange and both of you must hold your replacement
property for two years. If you sell to a related party, the
related party must hold the property for two years and
you must hold your replacement property for two years.
Caveat: If a related party transaction or series of
transactions was designed to avoid the application of the
related party rules, the exchange will be disallowed.
Related parties include: brothers and sisters (whole or
half blood), spouses, children, parents and any other
ancestors, any lineal descendents, and corporations or
other business entities; in which you own more than
50% either directly or indirectly through your family
members. Related parties also include certain duciary
relationships described in IRC §267(b).
Do I have access to my money during the exchange?
No. e Treasury Regulations governing exchanges
prohibit you from having actual or constructive receipt
of the exchange funds during the exchange period. Only
if you fail to identify the replacement property in writing
within the 45-day identication period may you have
your funds on the 46th day following your disposition.
Otherwise, you must wait until you complete your
exchange or until the expiration of the 180-day exchange
period before you receive exchange funds. See Treasury
Regulation 1.1031(k)-1(g)(6), commonly referred to as
the “g6” restrictions or limitations.
Exchange expenses: Exchange expenses are certain
customary closing costs incurred in connection with
selling property that reduce the amount the taxpayer
is required to reinvest because paying for these costs
reduces the taxpayer’s gain. e use of proceeds to pay
some closing costs, however, may result in boot. Revenue
Ruling 72-456 provides that brokerage commissions
reduce the taxpayer’s gain and increase the basis of the
replacement property. Technical Advice Memorandum
8328011 implies that other transactional expenses should
be allowed (i.e., reduce gain) if paid from the proceeds in
connection with the exchange. ese allowable expenses
are referred to as “exchange expenses” in IRS Tax Form
8824, but are not specically listed anywhere. Most tax
practitioners consider the following exchange expenses to
be allowable for purposes of reducing realized gain and
recognized gain: real estate commissions, exchange fees,
legal fees, title and escrow fees, and transfer taxes.
Glossary
Of TeRms
ACCOMMODATOR OR QUALIFIED INTERMEDIARY
QI OR FACILITATOR – A person or other entity who
assists the exchanger to eect a tax-deferred exchange by
holding the exchange proceeds, and acting as the principal
in the sale of the relinquished property and the purchase of
the replacement property. e accommodator/QI/facilitator
cannot be the taxpayer, a related party or an agent of the
taxpayer.
ADJUSTED BASIS – In most cases, the adjusted basis is
equal to the purchase price, plus capital improvements, less
depreciation. Transactions involving exchanges, gifts, probates
and trust distributions may impact the property’s adjusted
basis. e exchanger’s tax or legal advisor is the proper party to
determine adjusted basis.
BASIS – In general, basis is the original cost of the property.
is is the starting point for determining gain or loss in any
transaction.
BOOT – Boot is any type of property received in an exchange
that is not like-kind, such as cash, mortgage notes or stock.
e exchanger pays taxes on boot (i.e., recognizes) to the
extent of realized gain. In an exchange, funds not used to
purchase the replacement property are taxable boot.
CAPITAL GAIN – Capital gain is the dierence between the
selling price and the adjusted basis of the property.
CONSTRUCTIVE RECEIPT – e exchanger is considered
to be in “constructive receipt” of money at the time the
money is credited to them, set aside for them or otherwise
made available so that they may draw upon it an any time or
at any time notice of intention to draw upon it is given. e
taxpayer may not pledge, borrow or otherwise hypothecate the
exchange proceeds. In addition, actual or constructive receipt
of money by an agent of the taxpayer is deemed actual or
constructive receipt by the exchanger (Reg 1.1031(k)-1(f)(2).
To avoid constructive receipt, the exchanger must be subject
to the substantial restrictions set forth in the safe harbors in
the Treasury Regulations under § 1.1031(k)-1(g).
DEFERRAL – Payment of capital gains tax is deferred until
the exchanger sells the replacement property (unless the
exchanger engages in another exchange).
DIRECT DEEDING – Direct deeding occurs when
title to the relinquished property is conveyed direct from
the exchanger to the buyer without an intervening deed
to the QI and when title to the replacement property is
conveyed directly from the seller to the exchanger without an
intervening deed to the QI.
EXCHANGE ACCOMMODATION TITLEHOLDER
EAT – e entity that holds title to either the relinquished
property or the replacement property in connection with
a reverse exchange or holds the replacement property in an
improvement exchange. In most cases, the EAT is aliated
with the QI handling the exchange.
EXCHANGE PERIOD – e time allowed for the exchanger
to acquire the replacement property in a delayed exchange or
the time allowed to dispose of the relinquished property in a
reverse exchange. In a delayed exchange, the exchange period
starts on the day the relinquished property is transferred and
ends on the earlier of the 180th day thereafter or the due
date of the exchanger’s tax return. In a reverse exchange, the
exchange period starts on the day the property is acquired by
the EAT and ends 180 calendar days thereafter.
IDENTIFICATION PERIOD – e 45 calendar day time
period within which the exchanger must identify – in writing
– properties they intend to purchase as replacement property
in the exchange. e exchanger is restricted as to the number
of properties they are allowed to list on their identication
notice. (e identication notice must be in a writing, signed
by the exchanger and sent to the QI or someone else involved
in the exchange, who is not disqualied, on or before the
expiration of the 45 calendar days.)
Identication rules restricting the number of properties an
exchanger may identify:
• 3-property rule: the exchanger may identify a total of
three properties of any value; or
• 200% rule: the exchanger may identify any number of
properties, as long as the total fair market value of all of the
properties identied does not exceed 200% of the value of
the relinquished property; or
• 95% exception rule: the exchanger may identify any
number of properties, as long as they actually acquire 95%
of the value of the properties identied.
QUALIFIED EXCHANGE ACCOMMODATION
AGREEMENT QEAA – A written agreement whereby the
EAT agrees to purchase and hold title in a reverse or improved
exchange.
REALIZED GAIN – Gain that is not yet taxed. In a
successful exchange, the gain is realized but not recognized,
i.e., not taxed.
RECOGNIZED GAIN – Refers to the amount of gain that is
subject to tax.
RELATED PARTY – IRC §267(b) and 707(b)(1) denes
related party as any person or entity bearing a relationship
to the exchanger, such as: members of a family, including
brothers, sisters, spouse, ancestors and lineal descendants; a
grantor or duciary of any trust; two corporations which are
members of the same controlled group or individuals; and
corporations and partnerships, if the same person owns more
than 50% of the stock, capital or prots in these entities.
RELINQUISHED PROPERTY (property sold) – e
property disposed of by the exchanger.
REPLACEMENT PROPERTY (property purchased) – e
property acquired by the exchanger.
TRANSFER TAX – A tax assessed by a city, county or state
on the transfer of property.
YOUR NATIONAL
1031 Exchange
eXpeRTs
nfortunately, there is no federal regulation of the Qualied
Intermediary industry. And, because it is fairly easy to become
a Qualied Intermediary, it is imperative that you place your
exchange funds with a Qualied Intermediary that can protect your assets.
When you choose OREXCO, you are assured that your exchange funds are
secure and that your documents will be accurately prepared in a timely manner.
OREXCO is a member of the Old Republic Title Insurance Group, which is a
wholly-owned subsidiary of Old Republic International (NYSE:ORI), a
multi-billion dollar corporation, which ranks among the nation’s 50 largest
publicly-held insurance organizations.
We hope this information is useful to you, so that you can have a meaningful
conversation with your tax advisors. If you have additional questions, please
call one of our regional oces, which are located throughout the United
States or visit our website for up-to-date information and resources at
www.orexco1031.com.
FEA MEMBER: FEDERATION OF EXCHANGE ACCOMODATORS
OREXCO does not provide tax or legal advice. Consult with your tax advisor to
determine whether an exchange is appropriate for your circumstances.
Call our National Oce at
800-738-1031
Visit us at www.orexco1031.com
(8/13)
Visit our website at www.orexco1031.com
© 2013 Old Republic Exchange Facilitator Company
TM
All Rights Reserved.
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800-738-1031
