Frequently
asked questions:

The below is general information derived from reading the Internal Revenue Code, and is not tax or legal advice. The reader and/or user of the information acknowledges, and Crawford Exchange Services and its Qualified Intermediaries disclose, that Crawford Exchange Services and its Qualified Intermediaries are not accountants or attorneys. All tax payers should seek competent professional and legal advice. The sole responsibility for a successful tax deferred exchange rests 100% with the tax payer. The role of the independent Qualified Intermediary is that of an accommodator, and not a tax advisor.

The Internal Revenue Code, via Section 1031 allows a tax payer to defer/postpone the payment of capital gains tax from the sale of investment property, if the proceeds are reinvested into like-kind property.

All real estate property is like-kind to all other real estate.

The exchanger must trade equal or up in equity, and equal or up in fair market value.

If the exchanger trades down in either fair market value or equity, then some gain is likely to be recognized.

What is Boot?

If the exchanger receives cash upon the sale of the relinquished property, this is "cash boot", and tax will likely be recognized to the extent of the gain. "Mortgage Boot" may also occur if the exchanger fails to purchase a replacement property of equal or greater value with a mortgage less than the amount of the mortgage on the relinguished property, also resulting in a possible tax liability.

Partnership Interest?

An interest in a partnership does not qualify if traded for an interest in another partnership. However, a partnership as an entity can exchange real estate it owns for other like-kind real estate.

Sale/Lease Back?

A lessee's interest in a lease for real property with a term of 30 years or longer is considered like-kind real estate.

Personal Property?

Personal property assets in a trade or business can be exchanged for like-kind assets.

Vacation Homes?

A vacation home or second home not held as a rental is classified as real estate held for personal use, and does not qualify for 1031 treatment.

However, under the rules of Section 280, a dwelling unit held for both personal use and rental purposes must take a use test each year to determine its tax classification for that year.

The property is treated as real estate held primarily for personal use and treated as an asset not held for profit, if the owner's personal use is more than 14 days or 10% of the total rental days, and the unit is rented for one day or more during the tax year, i.e. this property does does not qualify for a tax deferred exchange if the property fails this test.

The property is treated as a rental or investment property if the owner's personal use is no more than 14 days or 10% of the rental days during the tax year and the property is rented more than 14 days during the tax year … the property may qualify (careful documentation is advised) for a tax deferred exchange.

Time Restrictions?

The exchange period begins on the date you transfer the relinquished property and ends on either the earlier of 180 days from the date of closing of the relinquished property, or the due date (including extension) for your tax return for the taxable year in which the transfer of the relinquished property occurs.

The identification period during which you must notify the QI in writing identifying the replacement property(ies) begins on the date you transfer the relinquished property and ends 45 days after.

The 45 days for notice and the 180 days for closing begin with the date of closing of the relinquished property. There are no extensions to these dates regardless of holidays, weekends or anything else … no kidding!

Replacement Property?
(Only satisfy one of the following rules … properties selected must be within the United States.)

The 3-property rule: The maximum number of replacement properties you may identify is three properties, without regard to fair market value of the properties.

OR

The 200 percent rule: You may identify any number of properties, as long as their total fair market value does not exceed 200 percent of the total fair market value (sales price) of all the relinquished properties.

OR

The 95 percent rule: If the tax payer violates both the 200% rule and the 3-property rule, the taxpayer is deemed not to have identified any replacement property, with the following exception:

If the fair market value of the replacement property actually received by the taxpayer is at least 95% of the total fair market value of all identified replacement properties, the exchange may qualify.

Correct Sales Contract Paragraph?

Contact us or your attorney for the property addendum or insertion into your selling and acquisition contract to enable you to set in motion your 1031 Exchange.

Your exchange agreement and the exchange process must be in place prior to you selling and “closing”/transferring title on the relinquished property in order for you to attempt to qualify for a 1031 Exchange.