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What is an I.R.C. Section 1031 Exchange?
It is an exchange of property held for productive use in a trade or business or for investment for other “like kind” property held for productive use in a trade or business or for investment.

What is “like kind” property?
It is property which meets the definitions contained within Reg. 1.1031(k)-1. All real property held for productive use in a trade or business or for investment is like kind to all other property so held. Personal property is not so easily traded.

Is there some property which cannot be exchanged tax free?
Although anything can be traded for anything else, the trade may not be tax free. Some property is never eligible for a tax free exchange. A second home is personal use property in that category.

What steps need to be taken to start an exchange?
Discuss the exchange with the real estate agent listing your property or if there is a pending offer, the agent who presented it.

Discuss what is happening with your attorney and/or C.P.A. Should the exchange be simultaneous or non-simultaneous? How should closing occur and funds be transferred? There is no substitute for the advice you get from a well qualified advisor who knows you and is looking out for your interest. Neither this fact sheet or other information provided by Casterline Henriksbo Exchange Service Company is intended to be a substitute for that advice.

If the replacement is going to close later than the day the relinquished property sells, you need to have an intermediary shelter you from receipt of proceeds and property.

What if the buyer wants me to carry a contract or trust deed?
You will complicate your exchange. The note or contract must be in the name of the accommodator. Then it must be used to acquire the replacement property or turned into cash. If neither happens, it must be given to the taxpayer. This usually causes tax consequences.

Why not just leave the money in escrow?
The escrow company acts on written instructions from the parties. If the seller chooses not to take the money, there must be instructions telling escrow what to do. This is constructive receipt. It invalidates the exchange.

Who may serve as an accommodator? What is the difference among companies which makes one better than another? Any party which is not disqualified may serve. Relatives and controlled business entities are disqualified. So are agents, which disqualifies your realtor, attorney, and C.P.A. Any accommodator should be questioned about experience. Many are willing to service but not all know what they are doing.

What happens at the time the first property sells?
The accommodator is assigned in as seller. The escrow documents are signed by the accommodator but approved as to form by the taxpayer. The proceeds are then paid to the accommodator and held according to the terms of the agreement.

Do all proceeds have to be reinvested?
No. The escrow can be instructed to disburse only part of the funds to the accommodator and the balance left for the taxpayer. Disbursement at the close of the sale or unused funds at the close of the exchange, will not disqualify it. This must be part of the exchange agreement to be allowed. There can be less debt on the replacement property without tax consequence if additional cash is put in to replace it. As a rule, less debt on the replacement is taxed as if the difference had been received in cash. Taking cash will always be taxable, even if there is more debt on the replacement than on the relinquished property.

What happens after the relinquished property sells?
Within forty five days, the taxpayer identifies potential replacement property. There are certain rules limiting the properties identified to either three properties or 200% of the fair market value of the exchange property. It must be purchased by the accommodator within 180 days. Before closing, the accommodator is assigned the right to purchase the property and does so with the taxpayer’s money.


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