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1031 Tax Deferred Exchanges

What is a 1031 Tax Deferred Exchange? If real estate is held for use by a business or held for investment, when it is sold, income taxes must be paid on any gain realized from the sale. However, if instead of selling the property, it is exchanged for other business or investment property, no gain is attributed to the transaction, and as a result, no gains taxes are due.

Allen, Morris, Trosi & Simon, LLP routinely act as the Qualified Intermediary in tax deferred exchanges. As a qualified intermediary, we assist the attorney representing the seller of business or investment real estate to complete the exchange transaction.

Tax deferred exchanges can only be used if the transaction meets very strict requirements. A biref outline of those requirements is set forth below. If you are still not sure how to make use of an exchange, or would like to know more, please call our office and one of the attorneys would be glad to discuss it with you.

Requirements for a 1031 Tax Deferred Exchange

1. Qualified Property: The real estate to be exchanged must be held for productive use in a trade or business, or be held as an investment. This means that the property you are giving up (referred to as the "Reliquished" property) and the one you are getting in exchange (referred to as the "Replacement" property) must both be qualified property.

2. Time Requirements:

• 45 Days from Closing on the Relinquished Property: Within 45 days after the closing on the sale of the relinquished property, you must provide Allen, Morris, Troisi & Simon LLP, as the qualified intermediary, with a written statement properly identifying the replacement property you wish to acquire. You can identify more than one property, but you should not identify more than three.

• 180 Days from Closing on the Relinquished Property: Within 180 days after the closing on the sale of the relinquished property, (or within 135 days after the 45 day indentification period referred to above has ended) you must complete the closing on the purchase of one of the properties previously identified as a replacement property.

3. The Qualified Intermediary: Utilizing the services of a Qualified Intermediary is necessary to realize the benefits of a tax deferred exchange. The seller of the real estate (referred to as the "Exchangor") must assign to the qualified intermediary their interest as seller of the relinquished property and their interest as buyer of the replacement property. The proceeds of the sale of the relinquished property must be paid directly to the qualified intermediary which holds the funds until they are used to purchase the replacement property. It is imperative that the exchangor, (the seller) not receive any of the funds from the sale. While it is permitted that the down payment on signing the contract can be held by the seller's attorney, once title to the relinquished property has been transferred, all proceeds of the sale must be paid to the qualified intermediary, including the funds received as the down payment. When the exchangor is ready to purchase the replacement property, the qualified intermediary pays the funds to the seller of the replacement property and title to the replacement property put in the name of the exchangor.

Forms You Will Needd for a Tax Deferred Exchange

The forms provided from this web site are viewable in Adobe® Acrobat® Reader. If you do not have Acrobat® Reader, you can download the most recent version by clicking on this button.

Letter vs. Legal Most of the forms you can download from this page are designed to be printed on letter size paper (8½" by 11"). If you download a document which is designed to be printed on a legal size page (8½" by 14"), when you print it, remember to change your printer setting to "legal size" paper.

8 Pages, Letter The Exchange Agreement
This agreement must be executed by the person desiring to make use of a tax deferred exchange.

2 Pages, Letter The Exchange Rider for the Contract of Sale of the Relinquished Property
This Rider is to be included in the contract of sale of the Relinquished Property.

1 Pages, Letter The Exchange Rider for the Contract to Purchase the Replacement Property
This Rider is to be included in the contract to purchase the replacement property.

The Law Itself: Section 1031 of the Internal Revenue Code

Sec. 1031. Exchange of property held for productive use or investment

• (a) Nonrecognition of gain or loss from exchanges solely in kind
  • (1) In general
    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 property of like kind
    which is to be held either for productive use in a trade or
    business or for investment.
  • (2) Exception
    This subsection shall not apply to any exchange of -
    • (A) stock in trade or other property held primarily for sale,
    • (B) stocks, bonds, or notes,
    • (C) other securities or evidences of indebtedness or
      interest,
    • (D) interests in a partnership,
    • (E) certificates of trust or beneficial interests, or
    • (F) choses in action.
      For purposes of this section, an interest in a partnership which
      has in effect a valid election under section 761(a) to be
      excluded from the application of all of subchapter K shall be
      treated as an interest in each of the assets of such partnership
      and not as an interest in a partnership.
  • (3) Requirement that property be identified and that exchange be
    completed not more than 180 days after transfer of exchanged
    property
    For purposes of this subsection, any property received by the
    taxpayer shall be treated as property which is not like-kind
    property if -
    • (A) such property is not identified as property to be
      received in the exchange on or before the day which is 45 days
      after the date on which the taxpayer transfers the property
      relinquished in the exchange, or
    • (B) such property is received after the earlier of -
      • (i) the day which is 180 days after the date on which the
        taxpayer transfers the property relinquished in the exchange,
        or
      • (ii) the due date (determined with regard to extension) for
        the transferor's return of the tax imposed by this chapter
        for the taxable year in which the transfer of the
        relinquished property occurs.

• (b) Gain from exchanges not solely in kind
  If an exchange would be within the provisions of subsection (a), of section 1035(a), of section 1036(a), or of section 1037(a), if it were not for the fact that the property received in exchange consists not only of property permitted by such provisions to be received without the recognition of gain, but also of other property or money, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property.

• (c) Loss from exchanges not solely in kind
  If an exchange would be within the provisions of subsection (a), of section 1035(a), of section 1036(a), or of section 1037(a), if it were not for the fact that the property received in exchange consists not only of property permitted by such provisions to be received without the recognition of gain or loss, but also of other property or money, then no loss from the exchange shall be recognized.

• (d) Basis
  If property was acquired on an exchange described in this section, section 1035(a), section 1036(a), or section 1037(a), then the basis shall be the same as that of the property exchanged, decreased in the amount of any money received by the taxpayer and increased in the amount of gain or decreased in the amount of loss to the taxpayer that was recognized on such exchange. If the property so acquired consisted in part of the type of property permitted by this section, section 1035(a), section 1036(a), or section 1037(a), to be received without the recognition of gain or loss, and in part of other property, the basis provided in this subsection shall be allocated between the properties (other than money) received, and for the purpose of the allocation there shall be assigned to such other property an amount equivalent to its fair market value at the date of the exchange. For purposes of this section, section 1035(a), and section 1036(a), where as part of the consideration to the taxpayer another party to the exchange assumed a liability of the taxpayer or acquired from the taxpayer property subject to a liability, such assumption or acquisition (in the amount of the liability) shall be considered as money received by the taxpayer on the exchange.

• (e) Exchanges of livestock of different sexes
  For purposes of this section, livestock of different sexes are not property of a like kind.

• (f) Special rules for exchanges between related persons
  • (1) In general
    If -
    • (A) a taxpayer exchanges property with a related person,
    • (B) there is nonrecognition of gain or loss to the taxpayer
      under this section with respect to the exchange of such
      property (determined without regard to this subsection), and
    • (C) before the date 2 years after the date of the last
      transfer which was part of such exchange -
      • (i) the related person disposes of such property, or
      • (ii) the taxpayer disposes of the property received in the
        exchange from the related person which was of like kind to
        the property transferred by the taxpayer,
        there shall be no nonrecognition of gain or loss under this
        section to the taxpayer with respect to such exchange; except
        that any gain or loss recognized by the taxpayer by reason of
        this subsection shall be taken into account as of the date on
        which the disposition referred to in subparagraph (C) occurs.
  • (2) Certain dispositions not taken into account
    For purposes of paragraph (1)(C), there shall not be taken into
    account any disposition -
    • (A) after the earlier of the death of the taxpayer or the
      death of the related person,
    • (B) in a compulsory or involuntary conversion (within the
      meaning of section 1033) if the exchange occurred before the
      threat or imminence of such conversion, or
    • (C) with respect to which it is established to the
      satisfaction of the Secretary that neither the exchange nor
      such disposition had as one of its principal purposes the
      avoidance of Federal income tax.
  • (3) Related person
    For purposes of this subsection, the term ''related person''
    means any person bearing a relationship to the taxpayer described
    in section 267(b) or 707(b)(1).
  • (4) Treatment of certain transactions
    This section shall not apply to any exchange which is part of a
    transaction (or series of transactions) structured to avoid the
    purposes of this subsection.

• (g) Special rule where substantial diminution of risk
  • (1) In general
    If paragraph (2) applies to any property for any period, the
    running of the period set forth in subsection (f)(1)(C) with
    respect to such property shall be suspended during such period.
  • (2) Property to which subsection applies
    This paragraph shall apply to any property for any period
    during which the holder's risk of loss with respect to the
    property is substantially diminished by -
    • (A) the holding of a put with respect to such property,
    • (B) the holding by another person of a right to acquire such
      property, or
    • (C) a short sale or any other transaction.

• (h) Special rule for foreign real property
  For purposes of this section, real property located in the United States and real property located outside the United States are not property of a like kind.

Allen, Morris, Troisi & Simon is located at 112 East 19th Street, New York, New York 10003. Our telephone number is (212) 353-0040, and our fax number is (212) 505-8652. You can send us e-mail at webmaster@amtands.com. Your comments and suggestions are welcome.

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