1. BOTH PROPERTIES MUST BE "LIKE-KIND"

• Like-kind simply means real property.
• Like-kind refers to the nature or character, not its grade or quality.
• Like-kind is a very broad and liberal category where just about any type of investment or business use property would qualify.
• Properties can be located anywhere within the United States with Exchanges taking place in one or more states.
• Examples of like-kind: rental properties (single family homes, duplexes, triplexes, apartment buildings and complexes, etc.), raw land, office buildings, shopping centers, businesses, marinas, golf courses, a lease of at least 30 years including options, parking lots, farms, factories, trailer parks, storage facilities, retail stores, interest in a co-tenancy.
• Examples of non like-kind: stocks, bonds, notes, interest in a partnership, personal property, certificates of trust, chooses in action.
• Investors can "mix and match" their properties. For example, an investor can sell a duplex and acquire raw land or sell a parking garage and acquire a multi-unit apartment building and a warehouse.

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2. BOTH PROPERTIES MUST BE HELD FOR INVESTMENT OR BUSINESS USE.

• Your use of both the relinquished property and replacement property must be investment or business use; each for a minimum of one to two years.
• Properties must not be used for personal use for more than 14 days per year or 10% of the actual number of days the property has been rented in a given year.
• Replacement property cannot be purchased with the intent to sell immediately.

3. EXCHANGER MUST USE A QUALIFIED INTERMEDIARY OR FACILITATOR.

• One of the safe harbors of the regulations is the use of a qualified Intermediary to facilitate the Exchange.
• The sale of the relinquished property and the acquisition of the replacement property must "flow" through the Intermediary. This is done through direct deeding to avoid duplicate transfer taxes.
• The qualified Intermediary may not be the taxpayer or an agent of the taxpayer (realtor, attorney, tax advisor, banker, accountant, employee, etc.) or lineal descendant of the Exchanger.

4. EXCHANGER MUST USE A QUALIFIED ESCROW AGENT AND HAVE NO ACTUAL OR CONSTRUCTIVE RIGHTS TO THE SALE PROCEEDS OF THE RELINQUISHED PROPERTY.

• The qualified Escrow Agent may not be the taxpayer or an agent of the taxpayer (realtor, attorney, tax advisor, banker, accountant, employee, etc.) or lineal descendant of the Exchanger.
• The Exchanger must not have access to the sale proceeds of the relinquished property.
• The Exchanger is entitled to all earnings on the escrow funds. These taxable funds must also be restricted in the same manner as the principle.
• The Exchanger chooses the Escrow Agent.
• The Exchanger is entitled to obtain security for his funds.

5. THE PROPER DOCUMENTATION MUST BE USED IN ORDER TO COMPLY WITH 1031 REGULATIONS.

• 1031 EXCHANGE AGREEMENT BETWEEN THE EXCHANGER AND THE INTERMEDIARY
• This is the most important document in the Exchange. It is the document in which the Exchanger gives theIntermediary the right to acquire the relinquished property from the Exchanger and convey it to the buyer. It also gives the Intermediary the right to acquire the replacement property from the seller and then convey it to the Exchanger.
• 1031 EXCHANGE ESCROW AGREEMENT BETWEEN THE INTERMEDIARY AND ESCROW AGENT
• If Island Financial is acting as both your Intermediary and Escrow Agent, the Escrow Agreement will be incorporated into the 1031 Exchange Agreement between the Exchanger and the Intermediary.
• 1031 EXCHANGE AMENDMENT AND ASSIGNMENT FOR THE ROLLOVER OF THE RELINQUISHED PROPERTY
• Assigns the Exchanger¹s rights in the Agreement of Sale with the buyer to the Intermediary.
• Serves as written notification to the buyer of the relinquished property of Exchanger¹s intent to effect a 1031 Exchange and also provides a hold harmless clause to assure the buyer that there are no additional liabilities or costs to him.
• If a 1031 Exchange Clause is inserted into the Agreement of Sale, this document is unnecessary.
• 1031 EXCHANGE AMENDMENT AND ASSIGNMENT FOR THE ACQUISITION OF THE IDENTIFIED REPLACEMENT PROPERTY
• Assigns the Exchanger's rights in the Agreement of Sale with the seller to the Intermediary.
• Serves as written notification to the seller of the replacement property of the Exchanger's intent to effect a 1031 Exchange and also provides a hold harmless clause to assure the seller that there are no additional liabilities or cost to him.
• If a 1031 Exchange Clause is inserted into the Agreement of Sale, this document is unnecessary.

6. EXCHANGER MUST ADHERE TO TIME LIMITATIONS.

• The 45-Day Identification Period begins at the closing of the relinquished property and requires the identification of like-kind replacement property.
• During this 45-Day Identification Period, you may revoke an identification and make a new one.
• If a like-kind replacement property has not been properly identified to the Intermediary by midnight of the 45th day, the Exchange will not work and the taxpayer will be unable to defer the capital gains.
• The 180-Day Exchange Period runs concurrently with the 45-day Identification Period and requires the acquisition of at least one of the identified replacement properties.
• If the settlement of the relinquished property occurs between October 16 and December 31 of the current year, the 180-day Exchange Period will be shortened to the income tax deadline of April 15 of the next calendar year unless a timely and proper IRS extension is filed for their return. For a corporation, this filing date is March 15 of the next calendar year unless an IRS extension is filed.

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LIMITATIONS ON THE NUMBER OF REPLACEMENT PROPERTIES THAT CAN BE IDENTIFIED:

1. THREE PROPERTY RULE:

Exchanger may identify up to three properties regardless of their fair market value. The Exchanger is not obligated to purchase all three properties but must purchase at least one of the three identified properties. For example, if selling a relinquished property for $100,000, three replacement properties can be identified with a combined fair market of $750,000.

2. 200% VALUE RULE:

Exchanger may identify more than three properties but their combined or fair market value cannot exceed double (200%) the fair market value of the relinquished property. For example, if a relinquished property was sold for $100,00 and four or more replacements are identified, their combined fair market value cannot exceed $200,000 with 200% or double the sale price of the relinquished property.

Exceptions to the Three Property Rule and the 200% Value Rule:

1. Any replacement property acquired within the 45-day Identification Period will be treated as properly identified, regardless of whether or not it is within the Three Property Rule or 200% Value Rule.

2. If the Three Property Rule and 200% Value Rule are violated, the property will still be treated as properly identified, provided that 95% of the combined fair market value of the identified replacement property has been acquired. For example, assume a $100,000 property was sold and five properties with a combined fair market value of $800,000 are identified. This will be treated as properly identified provided all five properties are acquired. It is almost impossible to acquire 95% of the property without acquiring all 100% of the property.

Once again, if you would like even more details, we recommend you contact Bayview Financial Exchange Services or First American Exchange as the qualified intermediary. Bayview Financial Exchange Services has been generous enough to provide us with more in-depth 1031 Exchange information on this website, and we appreciate their emphasis on education. Finally, if you would like to see the IRS's position on 1031Exchanges, click here.

Please consult your tax advisor for specific information relating to your exchange. We cannot give advice relating to capital gain tax due.

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