1031 Exchange Terminology 1031 Tax Deferred Exchange: The Internal Revenue Code, Section 1031, provides that neither gain nor loss is recognized when property held for productive use in a trade or business for investment is exchanged solely for like-kind property. There are different methods of exchanging, including delayed exchanges, simultaneous exchanges, construction exchanges and reverse exchanges. Accommodator: An intermediary is a party, usually a corporation that facilitates an exchange transaction by acting as the qualified intermediary. A qualified intermediary cannot be the taxpayer or a related party. Adjusted Basis: The taxpayer's adjusted basis in property is generally the initial cost increased by expenditures for capital improvements and decreased by allowable depreciation or cost recovery deductions. Boot: Anything given or relieved by the taxpayer other than qualifying like-kind property is commonly called "boot." This can be "cash boot" or mortgage boot. Constructive Receipt: Income is considered to have been constructively received when it is credited to the taxpayer's account, set apart for the taxpayer, or otherwise made available so that the taxpayer may draw on it at any time. Income is not constructively received if the taxpayer's control of its receipt is subject to substantial limitations or restrictions. Direct Deeding: At the direction of the qualified intermediary, title passes directly to the ultimate owners without the intermediary being on the title. Exchange Agreement: A deferred exchange is an exchange in which, pursuant to an agreement "Exchange Agreement," the taxpayer transfers real property held for productive use in a trade or business or for investment, and receives other property of a like-kind as replacement property in exchange. A qualified intermediary's exchange agreement is vital to a tax deferred exchange. Exchangor: Taxpayer, Client. Identification Period: Within 45 days of transferring title on the relinquished property. The taxpayer must adhere to one of the following three rules when identifying the replacement property.     1) The Three Property Rule: Up to three (3) properties without regard to their fair market value (FMV).     2) The 200% Rule: If four (4) or more properties are identified, their aggregate FMV cannot exceed 200%         of the sales price of the exchange property(ies).     3) The 95% Rule: If neither one of the above rules are followed, the exchangor must ACTUALLY        ACQUIRE at least 95% of the identified replacement properties. Relinquished Property: It is the property given up by the taxpayer in an exchange. It is also known as "down-leg property," "Phase 1." Replacement Property: It is the property ultimately received by the taxpayer in an exchange. It is also known as "up-leg property," "Phase 2." Safe Harbors: Are formats or devices approved by the IRS that may be used in structuring an exchange. They are consistent of the use of certain prescribed security devices, including "qualified intermediary." Use of a safe harbor helps shield the taxpayer from a determination that the taxpayer is in constructive or actual receipt of money or "other real property" for purposes of IRC 1031.

1031 Exchange Rules Two rules must be met to completely defer income taxes on the gain realized from the sale of the relinquished property:   1) The purchase price of the replacement property must be equal to or greater than the net sales price of      the relinquished property; and 2) All cash or other proceeds received from the sale of the relinquished property, "Phase I" must be used to      acquire the replacement property, "Phase II". Therefore, not only does rental or other income property qualify, but also unimproved real property held for investment qualifies. Unimproved property can be exchanged for improved or unimproved property as desired. One property may be exchanged for several, or several properties may be consolidated into one. This means that almost any property that is not a personal residence or a second home will qualify under Section 1031. Even a second home that is used partly personal and part income producing may be exchanged. The investor has a maximum of 180 days from the close of escrow or transfer of title of the relinquished property to close escrow on the replacement property. The first 45 days of that period is called the Identification Period. During the 45 days, the investor must identify the replacement property. The identification must be in writing, signed by the investor, and received by the intermediary or other qualified party, faxed, postmarked or otherwise identifiably transmitted within the 45 day period. Failure to meet the identification requirements will result in the transfer of the relinquished property becoming a taxable event. The investor may identify three properties of any value, one or more of which must be acquired (Three Property Rule). If more than three properties are identified, the aggregate fair market value of all properties may not exceed 200% of the value of the relinquished property (Two Hundred Percent Rule). 1) Three Property Rule: Up to three properties without regard to their fair market value (FMV). 2) 200% Rule: If four or more properties are identified, their aggregate FMV cannot exceed 200% of the sales price of the exchange property(ies). 3) 95% Rule: If neither one of the above rules are followed, the exchangor must ACTUALLY ACQUIRE at least 95% of the identified replacement properties.

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