* Section 1031 of the Internal Revenue Code provides an exception to the rule that when you sell property, you must recognize any gain from the transaction and such gain is subject to capital gains tax. The 1031 rule allows the deferment of capital gains tax that would have been owed on such a sale. An exchange for like-kind property defers the capital gains tax, leaving the property owner with substantially more proceeds for purchasing replacement property – which may provide great leverage, diversification, geographic relocation, improved cash flow and/or property consolidation.

What are the benefits of a 1031 exchange for me?

* Deferral of capital gains tax with a current yield.
* Ownership of a higher-quality property.
* Freedom from the day-to-day management.
* Predictable cash flow.

What are the risks associated with a 1031 exchange?

Investors will be subject to all of the risks that are normally associated with real estate, including but not limited to the uncertainty of cash flow; changes in the investment climate for local real estate (such as declining values or increased supply of residential communities), changes in interest rates, cap rates and the availability of permanent mortgage funds; changes in real estate tax rates and other operating expenses; changes in local government rules; and acts of God or other disasters which may result in uninsured losses brought on by fires, floods, earthquakes, tornados, hurricanes, acts of terrorism; etc.

* What is the Terminology that I need to know?

Accommodator: Qualified intermediary.

Basis: Exchanger’s investment in property, for tax purposes.

Boot: Cash or other non-qualifying (not like-kind) property received in an exchange; boot is taxable.

Buyer: Person buying the relinquished property.

Client: Exchanger; the taxpayer; the investor.

Constructive Receipt: Control of the cash proceeds with or without actual physical possession. If the client is in “constructive receipt,” the transaction will not qualify.

Deferred Exchange: Same as a 1031 exchange; reciprocal transfer of relinquished property for replacement property.

Direct Deeding: The deeding of property from the exchanger directly to the buyer (or vice versa), rather than indirectly through the accommodator.

Exchanging Up: “Exchange even or up in value; exchange even or up in equity and in debt”.

Exchanger: The client; the taxpayer; the investor.

Like-Kind Property: Like-Kind refers to the type of property being exchanged: any real estate investment for any other type of real estate investment. Example: Commercial property can be exchanged for multi-family residential property.

Qualified Intermediary: An independent middleman that facilitates the exchange process by selling the relinquished property and acquiring the replacement property on behalf of the taxpayer; also know as the Accommodator.

Qualifying Property: Property held for investment, income, or productive use in a trade or business, and not primarily for sale; also known as “like-kind” property.

Relinquished Property: Property being sold; property being replaced; old property; “downleg”.

Replacement Property: Property being acquired; target property being bought; new property; “upleg”.

Safe Harbor: A device approved by the IRS which shields the exchanger from receiving sale proceeds; a qualified intermediary is by far the most commonly used safe harbor.

Seller: Person selling the replacement property.