Exchangor: Taxpayer who intends to dispose of one property and acquire another
and wishes to deferred capital gains tax.
Relinquished Property being disposed of by Exchangor that was held for use in trade
Property: or business or investment. Cannot be personal residence or property
held for re-sale.
Replacement Property being acquired by Exchangor that he intends to hold for use in
Property: trade or business or for investment.
Qualified Safe Harbor allowed by the IRS to facilitate the exchange. A Qualified
Intermediary: Intermediary is not the Exchangor or a disqualified person (relative,
employee or agent) and enters into a written agreement with the
Exchangor which establishes the intent to exchange and outlines the
contractual relationship between the parties.
Exchange A written agreement between the Exchangor and Qualified
Agreement: Intermediary which restricts the Exchangor’s access to the Exchange
funds and requires the Intermediary to dispose of the relinquished
property and acquire the replacement property, transferring that to the
Identification This is the time period in which the Exchangor must identify property
Period: which he is interested in acquiring. It commences on the day of the
closing of the relinquished property and ends on the 45th day afterward
regardless of whether that is a weekend or holiday.
Exchange Period: This is the total time period in which the Exchangor has to complete the
exchange (close on the replacement property). It also commences on
the closing of the relinquished property and ends 180 days thereafter or
on the due date of the Exchangor’s tax return (with respect to
extensions) whichever is sooner.
Basis: The purchase price of the relinquished property, less depreciation, plus
Boot: Cash, personal property and debt relief (all is generally taxable).
Like Kind Any type of real property is like kind to any other except for personal
Property: residences. A ranch can be exchanged for a duplex, an office building
can be exchanged for timbered ground or a rental house can be
exchanged for a farm.
Constructive For purposes of an exchange, the Exchangor or a disqualified person is
Receipt: not allowed to receive the proceeds at closing on the relinquished
property. The IRS has ruled that a disqualified person is a relative or
employee of, or an accountant, attorney, investment advisor or real
estate agent for the Exchangor. In order to circumvent the agency
issue, the IRS has established the safe harbor of a Qualified
Delayed Exchange: It is not necessary for an Exchangor to find someone who has the
property that he wants and that person wants what the Exchangor has.
The IRS has allowed for delayed exchanges, thereby giving the
Exchangor time to find replacement property for sale by a third party
after disposing of the relinquished property.
Time Constraints: 45 day Identification Period/180 day Exchange Period. The Exchangor
has 45 days from closing on the relinquished property to identify the
replacement property(s) which he is interested in acquiring. The 180
day Exchange Period also commences at closing of the relinquished
property and is the time frame allowed to complete the exchange.
Multiple Properties: There are three rules regarding the number of replacement property(s)
1. Three Property Up to three properties of any fair market value can be identified and
Rule: acquired by Exchangor.
2. 200% Rule: Any number of properties can be identified and acquired as long as the
value does not exceed 200% of the value of the relinquished property.
3. 95% Rule: If property with a value over 200% of the fair market value of the
relinquished property is identified, the Exchangor must acquire 95% of
the property identified.
It is important for anyone considering an exchange to obtain independent counsel from a tax
attorney or an accountant with respect to the income tax and other consequences of a 1031 tax deferred