Under Section 1031 of the Internal Revenue Code, owners of real estate held for investment
or use in a trade or business can swap their property tax-free for "like-kind" real estate.
Exchanges are made for people wanting to stay invested in real estate, increase their leverage and to avoid paying hefty taxes upon the sale of property.
Like Kind
- Apartments
- Rental Houses
- Retail Properties
- Commercial
- Raw Land
- Office Buildings
- Industrial
- Ranches
Non Qualifying Properties
- Personal Residences
- Dealer Property
- Partnership Interests
- Inventory
Reason to Exchanges
- Restoring Depreciation that will soon expire - by exchanging one property for another
of greater value.
- To upgrade size and/or quality of investment. An exchange can be utilized to combine the equity of one or more properties into a larger singular investment.
- To change investment location. An exchange can be executed in anticipation of market
trends to maximize appreciation potential.
7 Steps for a Successful 1031 Tax Deferred Exchange
Step 1: Consult with your tax and financial advisors to determine if a tax deferred exchange is appropriate for your circumstances and compatible with your investment goals.
Step 2: Listing the Relinquished Property for sale with a licensed real estate broker. During the first step the Exchanger will list the Relinquished Property with a real estate broker. The broker/agent will disclose the intent to complete an exchange in the listing agreement.
Step 3: Offer, Counter Offer and Acceptance. The Exchanger enters into a contract with the Buyer for the sale/exchange of the Relinquished Property. The broker/agent discloses the Seller/Exchanger's intent to exchange into the Purchase Agreement and Receipt for Deposit.
Step 4: Open escrow for the Relinquished Property and coordinate with the Facilitator. The Facilitator prepares the exchange agreement and coordinates with the escrow holder to close escrow as Phase I of a tax deferred exchange. Important: The exchange agreement must be in place and signed by all parties prior to close of escrow. Additionally, all earnest money deposits should be placed with the title company.
Step 5: Replacement Property Identification. After closing escrow for the sale of the Relinquished Property, the Exchanger must identify all Replacement Property within 45 days from day after close of escrow.
Step 6: Contracting for the Replacement Property. After closing on the Relinquished Property the Exchanger has 180 days to acquire the Replacement Property. With the help of his or her agent the Exchanger enters into contract to purchase the Replacement Property from the Seller. In the contract to purchase the agent discloses the Exchanger's intent to complete the exchange and obtains the Seller's cooperation.
Step 7: Open escrow for the Replacement Property. The Facilitator prepares the Phase II Exchange Agreement and coordinates with the Replacement Property Escrow holder. The funds held in trust by the Facilitator are placed in escrow and the Replacement Property is purchased by the Facilitator from the seller. The Facilitator then transfers the Replacement Property to the Exchanger and the transaction is closed as Phase II of a delayed exchange.
Identification of Replacement Property
Regardless of the number of relinquished properties transferred by the Exchanger as part of the same exchange, the maximum number of replacement properties that the Exchanger can identify is as follows:
3 Property Rule: Three properties without regard to the fair market values of the
replacement properties.
Or
200 Percent Rule: Any number of properties as long as their aggregate fair market value as of
the end of the identification period does not exceed 200 percent of the aggregate fair market value of all the relinquished properties as of the date the relinquished properties were transferred by the Exchanger.
Exception
95 Percent Rule: Any number of replacement properties identified before the end of the identification period and received before the end of the exchange period, but only if the Exchanger receives before the end of the exchange period identified replacement property the fair market value of which is at least 95 percent of the aggregate fair market value of all identified replacement properties.
Glossary of Terms
Accommodator: A principal involved in the exchange transaction who agrees to assist the exchanger to effect a tax-deferred exchange. Same as Facilitator or intermediary.
Accommodating Party: In an exchange of properties there is always a person or entity that steps in to accommodate or facilitate the exchange transaction. Depending on how the transaction is structured, the accommodating party may incur additional liability in their efforts to assist in the exchange.
Acquisition Property: Replacement property
Actual Receipt: When the Exchanger actually receives the funds from the sale of the Relinquished Property. Receipt of cash by the Exchanger before he receives the Replacement Property may be enough to destroy the tax deferred treatment of the transaction.
Adjusted Basis: Generally speaking the adjusted basis is equal to the purchase price plus capital improvements less depreciation. Transactions involving exchanges, gifts, probates and receiving property from a trust can have an impact on calculating the property's adjusted basis. The taxpayer's C.P.A. or tax advisor is the party to look to for these types of questions.
Boot: Boot is any type of property received or given up in an exchange that does not meet the like kind requirement. Generally speaking, receiving boot will trigger the recognition of gain and taxes. If the Exchanger receives boot, they will be taxed. Boot added or given up by the Exchanger does not necessarily trigger a taxable event. In a real property exchange, boot received is any type of property received by the exchange which is not real property held for investment or productive use in a trade or business.
Cash Boot: Cash Boot consists of cash and nonqualifying property. A car, a boat or receipt of the beneficial interest in a promissory note are all examples of Cash Boot.
Mortgage Boot: Mortgage Boot consists of the secured debt given up and received as part of the same exchange. If the exchanger increases the amount of debt on the Replacement Property verses the Relinquished Property, they have given mortgage boot. If the exchanger decreases the amount of debt on the Replacement Property verses the Relinquished Property, they have received mortgage boot. Generally speaking, mortgage boot received triggers the recognition of gain and it is taxable, unless offset by Cash Boot added or given up in the exchange.
Constructive Receipt: Even if the Exchanger does not actually receive the proceeds from the disposition of the Relinquished Property, the exchange will be disallowed if the Exchanger is treated as having constructively received the funds.
Delayed Exchange: Also called non-simultaneous, deferred and Starker. A delayed exchange is a tax deferred exchange where the Replacement Property is Received after the transfer of the Relinquished Property. In a delayed exchange the Exchanger must identify all potential Replacement Properties within 45 days from the transfer of the Relinquished Property and the Exchanger must Receive all Replacement Properties within 180 days or the due date of the Exchanger's tax return whichever occurs first.
Like-Kind Property: Refers to the nature of the property the Exchanger gives up or receives as part of the same tax deferred exchange transaction. In order to qualify as like kind the property given up or received must be held for productive use in a trade or business or held for investment to qualify as like-kind.
Realized Gain: Refers to a gain that is not necessarily taxed. In a successful exchange the gain is realized but not recognized and therefore not taxed.
Recognized Gain: Refers to gain which is subject to tax. When someone disposes of property at a gain or profit in a taxable transfer such as a sale, the gain is not only realized, but recognized and subject to tax.
Relinquished Property: The property given up by the exchange to start the 1031 exchange transaction. This property usually passes through an accommodator before transferring to the ultimate Buyer.
Reverse Exchange: An exchange where the Exchange acquires or gains control of the Replacement Property before disposing of the Relinquished Property.
Simultaneous Exchange: Also referred to as a concurrent exchange. A simultaneous exchange is an exchange transaction where the Exchanger transfers out of the Relinquished Property and Receives the Replacement Property at the same time.
Transfer Tax: A tax usually assessed by a city or county on the transfer of property. It may be based on equity or value. When structuring a multi-party exchange an exchange agreement will usually call for direct deeding to eliminate additional transfer tax.
April 15th
A taxpayer must identify replacement property within 45 days after the transfer of the relinquished property, and acquire the replacement property within the earlier of 180 days of the relinquished property closing, or the due date of the taxpayer's tax return.
This means that 1031 escrows that close after Oct. 18 will not have the full 180 days to acquire the replacement property unless the taxpayer files an extension.
Contact your CPA or tax attorney for advise.

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Before you put your house on the market, its best to put a shine to it.
The way you present your property to prospective buyers can make all the difference.
Without investing in expensive and time-consuming renovation and redecoration,
it's still possible to show your home to its very best advantage.
Curb Appeal
That first impression when prospective buyers drive up is very important.
If they don't find the outside appealing, they won't be interested in seeing what's inside.
The Yard
Mowed lawns, trimmed shrubbery and clean windows are a start.
Planting a few flowers or plants can do a lot to a front yard.
Fertilize and water the lawn and plants thoroughly 2-3 weeks before putting the house on the market.
Clean up oil spots on the driveway. Make sure the garage door opens easily.
Swimming pools should be clean along with the pump and filters.
Clean up and throw away any junk or items laying around the yard.
Now is a good time to have a yard sale, get rid of those items that you don't plan
to take with you. Do this before you put your house on the market to greatly reduce the "detrimental clutter look".
Start packing away little things that you don't use everyday.
Recycle magazines, newspapers, bottles, cans and so on.
Pet droppings can easily turn the buyer back to the front door.
The Exterior
If your house could use a paint job and you don't have the time or money, some times hosing it off(from the bottom up) and repainting the trim will update the entire facade.
At least paint the side facing the street.
A clean front porch with a fresh looking front door that opens smoothly is a must.
Any broken windows should be fixed now as they will most likely be before closing.
A few gallons of stain or paint can add real impact to a fence.
The Interior
Inside, everything should be spotless.
Spending $100 to have someone do heavy "spring cleaning" if needed can bring a return many times over in the sales price and time on the market.
A fresh coat of light colored paint on the walls is always recommended.
Painting only the trim and the doors will add a lot.
Check to see that all doors open and close freely. Oil any squeaky doors.
Replace any burned out light bulbs. Brighter lights enhance many rooms.
Steam clean the carpets if new carpeting is not possible and to help eliminate any pet odors. Wash and wax linolium floors. Repair or replace damaged or missing tiles.
Bathrooms should sparkle. Remove soap scum and mildew. Replace old looking toilet seats. Kitchens should be clean and bright. Clean oven and stove top. Exhaust fans should be free of grease and dust. Clear all unnecessary objects from the countertops.
Keep curtains and blinds open and interior lights on for a bright warm cozy feeling.
Store stuff and clutter under beds, not in closets.
Focus Rooms
Buyers react most strongly to kitchens, bathrooms and closets, so it pays to concentrate your efforts here.
Sometimes just switching door handles, knobs, and light switch plates is a dramatic improvement. Replacing new shower curtains and sink faucets can pay off.
Tip
Preview the competition's open houses to see what you are up against in both pricing
and condition. Potential buyers will be previewing these and more.
In General
Try to look at your house "through the buyer's eyes" as though you've never seen it before.
Lockbox is #1 Importance. "If we don't have it, agents won't show it.

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by Kenneth R. Harney
For investors looking to pick up and rehab houses for quick resales, the rules in today's tough market are very different from a few years back.
Today's number one precaution, say high-volume rehab investment specialists, is this: Avoid over-improving properties -- or you'll lose your shirt and take forever to sell.
Ed Rooney, a long-time investor based in northern Virginia -- who has his own construction crews of carpenters, plumbers and electricians to renovate houses he buys -- says the key to making money right now is to spend less on fix-ups -- no more fancy kitchens and bathrooms -- and get out quickly.
During the housing boom years, Rooney says he'd typically spend $35,000 to $50,000 rehabbing a property -- installing cherry cabinets and granite counters -- and took anywhere from 30 to 60 days to finish the job.
Now "it's 12 to 15 days and anywhere from $4,000 to $19,000" -- and generally few if any of the fancy extras.
With foreclosures and short sales competing with everything that comes on the market, "you've got to be the lowest (asking) price in the area." Ideally this is by a 10 to 15 percent margin "if you're going to sell fast," Rooney told Realty Times in an interview.
To accomplish that, you not only have to buy low to start, but be highly cost-efficient in the types of rehab improvements you make, your contractors, and your turnaround time.
On the west coast of Florida, long-time investor and author John Schaub, who has bought hundreds of houses since the early 1970s, says it's essential that investors not become prisoners of "reproduction cost" formulas that used to work, but amount to over-improvements today.
"Although reproduction costs are often cited by appraisers and builders," Schaub says smart investors now have to ask a very different question: "Would you reproduce this building in today's (tougher) market?"
"When you look at house," Schaub says in his latest "Strategies and Solutions" real estate advisory, "ask yourself: Is it OVER-improved for the area?" based on what's selling or being built now?
"If a builder today can build a brand new house for $100 a square foot," says Schaub, a house built years ago for $150 a foot (even though it has a fancy kitchen and bathroom) "is now worth closer to $100 a foot" -- at least until buyers are willing to pay a premium again.
Excellent points to keep in mind.

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by Phoebe Chongchua
If you're putting your home on the market, better be sure you're ready to tell all -- good and bad.
"The majority of lawsuits or claims that occur are as a result of buyers finding out about something that is wrong with their property after the close of escrow and coming to the belief that the seller knew but didn't tell them," says real estate attorney, Peter Solecki of Winton & Larson, LLP.
Disclosure is vital. In one extreme case, it may have spared a seller from going to jail and even saved lives. The New York Times reported on a trial back in the late eighties that found the seller of a home guilty for not disclosing to the buyers that the home's heater had malfunctioned. The buyers and one of their children were asphyxiated by fumes from a gas-fired heater used to de-ice the driveway of their home. Only their four-year-old child survived. The seller was convicted of involuntary manslaughter. This case is believed to be the first of its kind where a home-seller was held criminally liable for the sale of a home that had a fatal defect.
While certainly this isn't a typical scenario. It gives good reason to pay attention to the details that you're disclosing when selling your home. It's not worth it to leave off some important details just because you think the home won't sell or will sell for less money if you disclose any problems.
Reporting problems about your property prior to the sale of it can be done through various reporting mechanisms such as the Transfer Disclosure Statement (TDS). But Solecki says some disclosure reporting statements are written in the present tense, which creates a reporting dilemma for some sellers.
"The seller will look at the Transfer Disclosure Statement and say well there was something wrong but it's not anymore; therefore, I don't have to disclose it," says Solecki. He adds, "If [sellers] haven't disclosed it and it turns out to be a problem, then you have a potential significant issue, whereas if it's been disclosed, then the buyer can elect what to do with it."
Chances are buyers won't decide to do anything further says Solecki. He says this is because the problem has been disclosed by the seller and reported that it's been fixed. The will allow the buyers to feel that the problem has been completely resolved and therefore will not hold up the sale of the home.
Reporting all problems with the home regardless of whether they have been fixed is the safest way to sell your home. Making sure you keep good records is vital because, as the years pass, many sellers forget about all the repairs they've done to the property.
"Every homeowner should have a file of everything they do to the house," says Solecki. This file should be given to the buyers for them to review. The file should show all problems and how they have been repaired, complete with receipts.
Solecki says this is a step above what many states require a seller to do. "Even though legally there's no real requirement to tell about fixed problems, those are as critical as the existing problems." He says when you don't report a problem, buyers generally learn about it from neighbors and then assume that you were not telling the truth when you sold the home. Fortunately, Solecki says most buyers tell the truth.
"They're not going to hide stuff because any buyer is going to find out thirty seconds after the property closes because there will be a knock on the door from the next door neighbor, with a plate of cookies, who will tell the buyers everything that happened in the house for the last three decades," says Solecki.
But many sellers resist disclosing problems for fear that their homes won't sell. "That's the fallacy. People think if I tell the truth about my house, a buyer won't buy," says Solecki. But he says if you sell the home with a problem and the buyer finds out after the close of escrow, the buyer will likely file litigation to resolve the problem—creating a huge headache.
If the seller properly discloses all issues with the home, then the buyer can make an educated decision to buy or not. "The fact is that the vast majority of buyers don't walk away. They decide to buy a house because they've determined it's the house for them. Once they've made that decision they usually find a way to make it work," says Solecki.
So, when's the best time to disclose? Right away. "The good real estate agents will get whatever negative information there is out there as fast as possible. Once buyers make a decision to go forward they will have made their decision based upon all these factors, including that one," says Solecki.
When you tell all before you sell, you're positioning yourself not only for a successful home sale but also a headache-free post sale. "[Not disclosing information] is the primary post-close-of-escrow issue because that's what leads to significant damages which is what leads to lawsuits," cautions Solecki.

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