Exchanger: Taxpayer who intends to dispose of one property and acquire another and wishes to deferred capital gains tax.
Relinquished Property: Property being disposed of by Exchangor that was held for use in trade or business or investment. Cannot be personal residence or property held for re-sale.
Replacement Property: Property being acquired by Exchangor that he intends to hold for use in trade or business or for investment.
Qualified Intermediary: Safe Harbor agent allowed by the IRS to facilitate the exchange. A Qualified Intermediary is not the Exchangor or a disqualified person (relative, employee or agent) and enters into a written agreement with the Exchangor which establishes the intent to exchange and outlines the contractual relationship between the parties. See Section 1.1031(b)-2.
Exchange Agreement: A written agreement between the Exchangor and Qualified Intermediary which restricts the Exchangor’s access to the Exchange funds and requires the Intermediary to dispose of the relinquished property and acquire the replacement property, transferring that to the Exchangor.
Identification Period: This is the time period in which the Exchangor must identify property which (s)he is interested in acquiring. It commences on the day of the closing of the relinquished property and ends on the 45th day afterward regardless of whether that is a weekend or holiday. See Section 1031(k)-1.
Exchange Period: This is the total time period in which the Exchangor has to complete the exchange (close on the replacement property). It also commences on the closing of the relinquished property and ends 180 days thereafter or on the due date of the Exchangor’s tax return (with respect to extensions) whichever is sooner. See Section 1031(k)-1.
Basis: The purchase price of the relinquished property, less depreciation, plus improvements.
Boot: Cash, personal property and debt relief (all is generally taxable).
Like Kind Property: Any type of investment property is like kind to any other investment property. A ranch can be exchanged for a duplex, an office building can be exchanged for timbered ground or a rental house can be exchanged for a farm. See Section 1.1031(a)-1. Property used for personal purposes (vs. investment/business) is not eligible for a 1031 tax-deferred exchange.
Constructive Receipt: For purposes of an exchange, the Exchangor or a disqualified person is not allowed to receive the proceeds at closing on the relinquished property. The IRS has ruled that a disqualified person is a relative or employee of, or an accountant, attorney, investment advisor or real estate agent for the Exchangor. In order to circumvent the agency issue, the IRS has established the safe harbor of a Qualified Intermediary. See Section 1.1031(b)-1.
Delayed/Deferred Exchange: Refers to the 45-day Identification and 180-day Exchange Periods. This allows the Exchangor to sell or buy (if Reverse exchange) a property and have a 45-day period in which to identify a replacement property (relinquished property if Reverse exchange) and complete all transactions from the time of closing on the first property to completing the exchange within 180 days. See Section 1031(k)-1.
Time Constraints: 45-day Identification Period/180-day Exchange Period. The Exchangor has 45 days from closing on the relinquished property to identify the replacement property(s) which he is interested in acquiring. The 180-day Exchange Period also commences at closing of the relinquished property and is the time frame allowed to complete the exchange. See Section 1031(k)-1.
Multiple Properties: There are three rules regarding the number of replacement property(s) allowed. See Section 1031(j)-1.
1. Three Property Rule: Up to three properties of any fair market value can be identified and acquired by Exchangor.
2. 200% Rule: Any number of properties can be identified and acquired as long as the fair market value does not exceed 200% of the value of the relinquished property.
3. 95% Rule: If property with a value over 200% of the fair market value of the relinquished property is identified, the Exchangor must acquire 95% of the property identified.
It is important for anyone considering an exchange to obtain independent counsel from a tax attorney or an accountant with respect to the income tax and other consequences of a 1031 tax-deferred exchange.