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What is a 1031 Exchange?
What must I do to have a fully deferred exchange?
Can you take cash out of a 1031 Exchange?
What is "boot"?
What property is like kind to my property?
How long do I have to identify?
Can I eventually use the replacement property for my own primary residence?
How should I take title to replacement property?
May I exchange less than 100% of my interest?
May I do a multiple leg exchange?
Do I receive a cost basis in my replacement property?
How do I report my 1031 Exchange to the IRS?
Can I close on my replacement property before I have a buyer for my relinquished property?
Terminology

What is a 1031 Exchange?
Internal Revenue Code Section 1031 provides that no gain or loss will be recognized on the exchange of any type of business use or investment property for any other business use or investment property.
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What must I do to have a fully deferred exchange?
The general rule in order to have a fully deferred exchange is that you must trade equal or up in equity and equal or up in fair market value. The effect of this rule is that you must use the entire net proceeds from the relinquished property as down payment on the replacement property. Also, you must replace any mortgage paid off at the sale of the relinquished property with an equal or greater mortgage on the replacement property.
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Can you take cash out of a 1031 Exchange?
You cannot take cash out of an exchange without creating a taxable event. If an Exchanger elects to take some of the equity out of the sale proceeds in the way of cash or a note, this is called "BOOT" and is taxable. To avoid taxable boot an Exchanger should opt to refinance after the exchange transaction is completed rather than take cash out of the sale proceeds.
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What is "boot"?
If the exchanger receives cash upon the sale of the relinquished property this is "boot" and this amount will be taxed. If the exchanger fails to purchase a replacement property of equal or greater value than the relinquished property there is a strong possibility that he will be deemed to have received mortgage "boot." An exchanger can also receive other property which will be deemed boot.

For example, if the exchanger receives an automobile, art work, or any other thing of value as part of an exchange, that other non-like kind property will be deemed boot and taxed on the fair market value of the other property received.

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What property is like kind to my property?
When it comes to real estate, all property is like kind to all other real estate. For example, farm land can be exchanged for an office building, a condominium can be exchanges for a trailer park. Certain other tangible personal property can be exchanged, like airplanes and equipment. Whether this property is like kind is determined by reference to certain industrial classifications.
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How long do I have to identify?
The replacement properties must be identified within 45 days after the sale of the relinquished property. This requirement is strictly enforced, even if the 45th day falls on a holiday. Identification must be in writing, signed and dated by the exchanger and received by the QI no later than 45 days after the sale of the relinquished property. Replacement property must be identified unambiguously. Usually either a legal description or a mailing address is sufficient. The replacement property must be purchased within 180 days after the sale of the relinquished property.
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Can I eventually use the replacement property for my own primary residence?
Yes, but you must meet the holding requirement prior to converting the primary use of the property. Although the IRS has no specific regulations on holding periods, it is recommended that the property should be held for its intended use for at least two tax returns. Of course, the longer you hold the property as an investment or business use property, the better, especially when changing your intent of use.
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How should I take title to replacement property?
Title to the replacement property must be taken in the same name in which the relinquished property was held.
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May I exchange less than 100% of my interest?
Yes. A fractional part or undivided Tenant in Common (TIC) interest in the relinquished property may be exchanged and/or a fractional part of the replacement property may be acquired. Interests in Partnerships, Corporations, LLCs or REITS do not qualify.
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May I do a multiple leg exchange?
Yes. Several relinquished properties may be exchanged for a single replacement property. One relinquished property may be exchanged for several replacement properties. The important thing is that the exchange be part of a unified exchange agreement from the beginning. The 45 day identification rule and 180 day replacement rule will start running from the date of the sale of the first relinquished property. Sometimes because of this timing issue it is better to structure the exchange as a series of exchanges rather than a multiple leg exchange.
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Do I receive a cost basis in my replacement property?
No. Tax basis from the relinquished property is carried forward into the replacement property. Tax basis in the replacement property is increased by any additional cash or increase in mortgage by the exchanger. Once a depreciation allowance is taken on the relinquished property it may not be used a second time on the replacement property.
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How do I report my 1031 Exchange to the IRS?
Initially, your 1031 Exchange is reported on the IRS form 1099S which should indicate that you are effecting a 1031 Exchange and will receive property as consideration for the sale of your relinquished property. IRS Form 8824 must be completed as part of your annual federal return. In addition to determining your realized gain, recognized gain and your new basis, this form will ask the date you sold your relinquished property, identified and acquired your replacement property. Form 8824 is actually a supporting form for IRS Form 4797. The income received on rental properties must be reported on Schedule D of Form 1040.
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Can I close on my replacement property before I have a buyer for my relinquished property?
Yes. This exchange process is known as a Reverse Exchange.

Terminology

Deferred gain: Amount of "realized gain" that is not currently taxable.

Like Kind: No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for 'like-kind' property which is to be held either for productive use in a trade or business or for investment.

Qualified Intermediary: A third party or facilitator who is an independent principal who assists in completing a successful section 1031 tax-deferred exchange.

Realized gain: Difference between sales prices and adjusted tax basis.

Recognized gain: Amount of "realized gain" that is currently taxable.

Replacement Property: The property the Exchanger is buying. Also called new property.

Relinquished Property:The property the Exchange is selling. Also called the old property.

Section 1031: Section 1031 of the Internal Revenue code provides that tax on gain from the sale of real or personal property held for investment or business purposes can be deferred if the property is exchanged (rather than sold) for other like-kind property.

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