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Your Guide to IRC-1031 Exchanges...

1. If you exchange real estate is held for business use or investment, you can possibly qualify under the Internal Revenue Code 1031 for a non-taxable like-kind exchange. The property you receive is treated as if it were a continuation of the property you gave up. By following the rules and safe harbors of Regulation 1031, you may even qualify a delayed exchange which has become more prevalent today when exchanging real property.
2. In a like-kind exchange, you do not recognize gain from the like-kind property you receive. But you do recognize gain if you also receive money or other property. Money and other property received, including installment notes, is called boot. IRS uses the term "deferred exchange" to define what most real estate exchangers call a "delayed exchange." The IRS defines a "deferred exchange" as an exchange in which, pursuant to an agreement, the taxpayer transfers relinquished property and subsequently receives replacement property.
3. Purpose: In exchanging, the single most important issue is intention to complete a transaction as a IRC 1031 exchange. Documents preserve that intention and assure that the expectation of the parties is attained when one property is released to the other party long before escrow can be closed.
4. IRC 1031 liberally permits all variety of structuring which two people might arranged to meet problems created by mortgage financing, cash requirements, title, construction, third party owners, escrow needs, and such things as time to locate like kind property.
5. Rarely do two people own property which they both would exchange with each other. One or the other wants other property than what is offered. Hence, a search begins to locate other like kind property. That search must be prudent in a continuing investment program. Frequently, it requires more time than normally desired for escrowing. That is, one party wants to close out one leg of the exchange before the other leg can be located.
6. Thus, a delay must occur in the delivery of the yet-to be-located property. Deeds will be delivered non-concurrently. No simultaneous deeding can occur because of the inability to yet locate and identify the specific like kind property to be delivered up to the taxpayer-exchange. Hence, an open-ended escrow period is utilized to close out one leg of the exchange and await the deeding of the yet-to-be- located property so exchange escrow can be closed. However, strict time limits apply.
7. Basis of Property Acquired: 1031 exchanges are not "tax free." These exchanges merely postpone recognition of taxable gain until some future date when the property is ultimately sold.

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