Types of property that can be exchanged for other real property include leasehold interests with a remaining term of 30 years or more; certain oil and gas interests such as mineral leases with a remaining term of 30 years or more and royalty interests, perpetual water easements and conservation easements.

If the disposition and replacement of real property are structured properly, taxpayers can utilize IRC Section 1031 to defer the taxable gain arising from the sale of the old property. TVPX has the technical expertise to guide you through the entire 1031 exchange process.

To successfully structure an exchange of real estate under IRC Section 1031, taxpayers should consider several critical issues in advance of the closing, including:

• Ownership Structure: How is the old property owned? Is it in a partnership? A disregarded entity? Is there a co-tenancy structure?
• Timing: Do you have exchange timing issues? Are you buying before selling?
• Other taxes: How do transfer taxes affect the cost of your exchange?
• Value: Is the property you are selling worth more than the property you are buying? Will you make improvements to the replacement property? What are your options for maximizing the benefit of the exchange?
• Financing and equity: How much equity do you have in the property being sold? How much of the replacement property purchase price do you plan to finance? Is there an imbalance that needs to be addressed?

TVPX will work closely with you and your tax advisers to gain the maximum tax benefit from your real estate exchange.

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1. Consult your tax and legal advisors in advance of any closing to make sure that a 1031 exchange is appropriate for your situation and that you are aware of the requirements for a valid exchange.
2. Hire a financially sound exchange provider who is experienced in handling transactions involving the type of property you are buying and selling.
3. Do not directly or indirectly accept deposits or other sales proceeds without first consulting your tax adviser and exchange provider.
4. Include 1031 cooperation language in your contracts to sell and to purchase.
5. Consider the other tax implications (i.e. transfer tax, sales/use tax, property tax, etc.) in each step of the exchange and incorporate the appropriate provisions into your contracts.
6. Make sure other parties who are involved in the transaction, such as lenders and escrow agents, are aware that you are doing an exchange and are coordinating with the exchange provider.
7. For additional security, consider using a qualified trust to hold the sales proceeds during a forward exchange.
8. Sign the exchange documents and provide the signed copies to the exchange provider or the escrow agent as appropriate before accepting delivery or closing on the sale or purchase. Don’t close without double checking with your exchange provider to make sure they have everything.
9. Once the exchange has commenced, stay in close contact with your exchange provider and keep them fully informed about the status of your contracts and preparations for closings. Don’t close until the exchange provider confirms that they have everything they need to complete the exchange.
10. When the exchange is completed, confirm that your tax preparer has properly reflected the exchange on your tax returns and particularly on Form 8824.

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Generally you can benefit from an exchange as long as the value of the replacement property exceeds your tax basis in the relinquished property; provided, however, that to get the full tax benefit from the 1031 Exchange, the replacement property must have at least as much cash equity invested in it when it is acquired by the taxpayer and at least as much value as the relinquished property. Gain will be recognized to the extent of any shortfall.

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To have a good exchange, the taxpayer who sells must be the taxpayer who buys. An individual and a corporation are two separate taxpayers, even if the taxpayer owns all the corporate shares. However, an entity owned by the taxpayer that is disregarded for income tax purposes such as a single member limited liability company or a grantor trust in which the taxpayer is the beneficiary may be used to hold title to an exchanged asset without adversely affecting the exchange.

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Each property sold and purchased in the exchange must be held by the taxpayer for productive use in a trade or business or for investment and may not be inventory or predominantly used for personal purposes.

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The property sold in the exchange must be “like kind” to the property purchased. Real estate is generally like kind to other real estate. An undivided interest is usually considered to be exchangeable for a whole property and vice-versa.

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In a forward exchange the taxpayer has up to 45 days after the sale of the relinquished property to identify up to three possible replacement properties and 180 days after the sale of the relinquished property to close on the purchase of a properly identified replacement property (or until due date for filing tax return for year of sale, if sooner). In a reverse exchange the taxpayer has up to 180 days after the date the exchange commences to close on both the sale of the relinquished property and the acquisition by the taxpayer of the replacement property. Deadlines can only be extended in the case of federally declared disasters.

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