An I.R.C. Section 1031 Exchange
This is an exchange in which the taxpayer or Exchangor transfers property which is held for productive use in a trade or business or for investment in return for receipt of other "like kind" property which is also to be held for productive use in a trade or business or for investment purposes. During the exchange process, the taxpayer/Exchangor can have neither actual nor constructive receipt of either proceeds or property from the exchange.
Also known as the Qualified Intermediary or Facilitator, the Accommodator is an entity qualified as such under the "safe harbor" regulations set forth in the Tax Code. The Accommodator holds the exchange funds in trust for the taxpayer and creates a paper trial on behalf of the taxpayer to ensure the 1031 exchange is as successful as possible.
The basis of the property adjusted for any capital improvements or depreciation. To calculate the adjusted basis, take the basis (the cost of the property) and add the cost of capital improvements made to the property during the taxpayer's ownership, and subtract any depreciation taken on the property during the same period. Once the adjusted basis is known, gain or loss can be computed on a transaction.
The starting point for determining gain or loss in any transaction. In general, basis is the cost the taxpayer's property.
Basis in the Replacement Property
In an exchange, the deferral of the tax on the gain is accomplished by requiring the taxpayer to carryover (shift) the basis of the relinquished property to the replacement property with appropriate adjustments in the event additional consideration is paid.
In an exchange of real property, any consideration received other than real property is "boot". The amount of gain recognized is always limited to the gain realized or boot, whichever is the smaller amount. Therefore, for a transaction to result in no recognized gain, the taxpayer must receive property with (1) an equal or greater market value, and (2) with an equal or greater debt than the property relinquished, and (3) receive no boot. In exchanges there are two types of boot: cash boot and mortgage boot. Cash boot is cash or anything else of value received. Mortgage boot is any liability not assumed or taken subject to in the exchange.
The person who wants to acquire the Exchangor's relinquished property.
Control of the cash proceeds without physical possession.
The tax on an exchange transaction is not paid at the time of the transaction. Rather, it is paid at the time the replacement property is ultimately sold. Deferral is accomplished by substituting, or carrying over, the basis of the taxpayer's relinquished property to the replacement property making any necessary adjustments for additional consideration paid.
Exchanges of like-kind property ordinarily do not trigger any depreciation recapture (that is, deductions taken in excess of straight-line depreciation under Section 1250 I.R.C.).
Title to relinquished property passes directly from Exchangor to Buyer. Title to replacement property passes directly from Seller to Exchangor.
The time allowed for acquisition of the replacement property in a non-simultaneous exchange. It begins with the transfer of the relinquished property and ends on the earlier of the following: the 180th day thereafter or the date upon which taxes are due for the year in which the transfer of the relinquished property took place. If the automatic extension is applied for, the Exchange Period will be 180 days in length. If not, April 15 is the date for those paying taxes on a calendar year. Entities on a different fiscal year will have a different date for which taxes are due.
The amount obtained for a property minus the property's adjusted basis. No matter what the adjusted basis of a property is, there is no gain until the property is transferred. There are two types of gain: "realized gain" and "recognized gain". Realized gain is the difference between the total consideration (cash and anything else of value) received for a piece of property and the adjusted basis. Realized Gain is not taxable until it is recognized. Gain is usually, but not always, recognized in the year in which it is realized. If gain is not recognized in the year it is realized, it is said to be deferred. In an exchange under Section 1031, realized gain is recognized in part or in full to the extent that boot is received. Where only like-kind property is received, no gain is recognized at the time of the exchange.
The time in which prospective replacement properties must be identified in writing. This begins with the transfer and ends at midnight on the forty fifth day thereafter. It is customary to provide the Intermediary with written notice.
Improvement Exchange/Build-to-Suit Exchange
A tax-deferred, like-kind exchange whereby the Qualified Intermediary, by and through an Exchange Accommodation Titleholding ( "EAT") entity acquires title to the replacement property for the benefit of the Exchangor. During the 180 exchange period, the Exchangor then has certain capital improvements made to the replacement property. Once the improvements are completed, the Qualified Intermediary then transfer title back to the Exchangor. For more specifics on the Improvement/Build-to-Suit Exchange please contact our office of your tax advisor.
The party who facilitates a tax-deferred exchange by acquiring and selling property in an exchange. The Intermediary plays a role in almost all exchanges today. The Intermediary neither begins nor ends the transaction with any property. The Intermediary buys and then resells the properties in return for a fee. The Intermediary also manages the exchange proceeds.
Replacement property acquired in an exchange must be "like-kind" to the property being relinquished. Like-Kind means "similar in nature or character, notwithstanding differences in grade or quality." In order for property to qualify as "like-kind" the property must be in productive use for a trade or business or held for investment purposes, and be located within the United States. Foreign property does not qualify. The term "like-kind", however, is not as restrictive as it sounds. For example, raw land can be exchanged for commercial property and a single-family rental can be exchanged for office or retail property.
Whether one or more than one property is transferred by the taxpayer as part of one exchange, the number of replacement properties that may be acquired is: (1) Up to three properties, without regard to their fair market value (Three Property Rule), and (2) More than three properties, if the total fair market value of all these properties at the end of the 45 day identification period does not exceed 200% of the total fair market value of all properties relinquished in the exchange (200% Rule).
The property that the taxpayer begins the exchange with. This is the property that the taxpayer wishes to dispose of in the exchange.
A tax-deferred, like-kind transaction whereby the Qualified Intermediary, through the use of an Exchange Accommodation Titleholding entity acquires title to the replacement property first and holds title until such time as the relinquished property is later sold. The disposition of the relinquished property must occur within 180 days of the acquisition of the replacement property.
The person who owns the property that the taxpayer wishes to acquire in the exchange.
The Exchangor should consult with their personal tax and legal advisor regarding the tax and legal consequences of the proposed exchange. The Intermediary should not provide such advice.
Also called the Exchangor. The taxpayer has property and would like to exchange it for new property. While all parties in an exchange are theoretically taxpayers, this term applies to the party who expects to receive tax-deferred treatment under Section 1031.