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| Q. |
What are some of the key vocabulary terms to know in understanding an exchange? |
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| A. |
Adjusted Basis: Original cost of a property, plus the value of any improvements, minus any depreciation.
Boot: Any cash or other property received by the Exchanger in a 1031 Exchange, which is not considered like-kind.
Buyer: Person who purchases the property the Exchanger wishes to dispose of to do a 1031 Exchange.
Capital Gain: Difference between the selling price and the adjusted basis of a property.
Exchanger: Taxpayer who is electing to defer the capital gain taxes by completing a 1031 Exchange.
Like-Kind Property- Real Estate: Like-kind means "similar in nature or character, notwithstanding differences in grade or quality." In order for the properties to qualify as "like-kind" they must be held for productive use in a trade or business or held for investment purposes and be located within the United States. Example: raw land can be exchanged for an apartment building, or a shopping center can be exchanged for an office building.
Like-Kind Property- Personal Property: Like-kind means property that is in the same "general asset class" or in the same "product class."
Net Purchase Price: Purchase price less costs of purchase.
Net Sales Price: Sales price less costs of sale.
Qualified Intermediary: A third party that is not related to, or the agent of, the Exchanger, and who facilitates a 1031 Exchange on behalf of Exchangers, Sellers, and Buyers.
Realized Gain: Difference between the total value received for a property and the adjusted basis.
Recognized Gain: Portion of the realized gain, which is ultimately taxable. Not all realized gain is ultimately determined to be taxable and issues, such as boot, can affect how and when gain is recognized.
Relinquished Property: Property the Exchanger owns and wants to sell in a 1031 Exchange.
Replacement Property: Property the Exchanger wants to acquire to complete a 1031 Exchange.
Seller: Person who owns the property the Exchanger wishes to acquire as a replacement property to complete a 1031 Exchange. |
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| Q. |
What constitutes a Qualified Intermediary? |
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| A. |
The regulations under §1031 defines a Qualified Intermediary as follows:
A Qualified Intermediary is a person who:
(A) is not the taxpayer or
a “disqualified” person and;
(B) enters into a written agreement with the
taxpayer ( the exchange agreement) and,
(C) as a required by the exchange
agreement, acquires the relinquished property from the taxpayer, transfers
the relinquished property, acquires the replacement property and transfers
the replacement property to the taxpayer.
The regulations go on to define a disqualified person as:
1. A person who has acted as the taxpayer's employee, attorney, accountant,
investment banker or broker, or real estate agent or broker within the 2 year
period ending on the date of the transfer of the first of the relinquished
properties.
2. Brother, sister, spouse ancestors and lineal descendants of the taxpayer.
3. Certain persons who are (1) acting as a fiduciary for the taxpayer such
as a trustee of any trust; (2) Individuals or corporations that own more than
10% of the stock of a corporation that is also partly owned by the taxpayer;
and beneficiaries of trusts established by the taxpayer.
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| Q. |
Is it true that you have to buy the replacement property and sell the relinquished property at the same time? |
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| A. |
No. To qualify under §1031 the taxpayer must designate the replacement property(s) within 45 days of transferring the relinquished property and must acquire the replacement property within 180 days from the dispostion of the reliquished property.
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| Q. |
Once I exchange my property, am I limited as to what it can be replace with? |
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| A. |
In order to qualify as an exchange under §1031, real property used in a taxpayers trade or business or held for investment needs to be exchanged for other real property. Property used in a trade or business may be exchanged for property to be held for investment or visa versa.
In the area of real property the term "like kind" refers to the nature or character and not the grade or quality. Unimproved real estate held for investment may be exchanged for improved property to be held for investment or to be used in a trade or business.
An apartment building can be exchanged for an office building. A run down three family house can be exchanged for a first class strip mall.
In addition to typical pieces of real estate, real estate of any kind can be exchanged for a leasehold interest (ground lease) provided that the leasehold has a minimum term of 30 years remaining at the time of the exchange. As such, a taxpayer can exchange a shopping center for a leasehold interest in an office building that has more than 30 years remaining at the time of the exchange.
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| Q. |
I have specific questions about my situation, with whom can I speak? |
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| A. |
You can speak directly with the President, Lawrence Blacker by calling toll free 866-357-9090 or via email by clicking on a link or emailing us at info@ne1031.com. |
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