Guarantee Trust & Title Corp

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I. General Tax Exchange Guidelines II. Detailed Tax Exchange Guidelines: General Tax Exchange Guidelines - -The exchange must be a reciprocal transfer of properties as distinguished from a sale and repurchase, although the exchanges need not be simultaneous. -In order to fully defer income tax on the gain, the replacement property fair market value must be equal or greater than the fair market value of the relinquished property. -In order to fully defer income tax on the gain, your replacement property debt must be equal or greater than your relinquished property debt. General Statutory Requirements of Section 1031 Internal Revenue Code (IRC) Section 1031 permits property owners to exchange one property for another property without incurring income tax on the gain realized on the original property. There are a number of rules that restrict the types of real estate transactions that can qualify for a tax deferred exchange. The general statutory requirements are as follows: -The property surrendered and the property received must be of "like kind". -The property surrendered must not be property held primarily for sale or certain other excluded property. -In order to fully defer income tax on the gain, you must use all of your exchange proceeds from the sale of the relinquished to acquire your replacement property. - Background A tax deferred exchange can be an important tax planning strategy for an individual who owns investment real estate. Authorized by Section 1031 of the IRC, it is a method by which a property owner exchanges one property for another to avoid paying federal income taxes on the transaction. In a typical real estate sale, the property owner is taxed on any gain realized by the sale of the property. In a tax deferred exchange, however, the tax on the transaction is deferred until some time in the future, usually when the newly acquired property is sold. Because the exchange itself is not taxed, it is often referred to as a "tax free exchange". The transaction permits a property owner to dispose of one property and acquire another. The transaction must be structured in such a way that it is conducted as an exchange of one property for another, rather than the sale of one property and the purchase of another. This is often achieved by converting a sale and a reinvestment in a replacement property into an exchange by means of an exchange agreement and the services of a qualified intermediary, who ensures that the exchange is structured properly. Back to the Top Structure of an Exchange In a typical sales transaction, an individual sells property for cash. He can use a portion of the cash acquired in the transaction to pay tax on the gain. The net proceeds can then be reinvested in another investment. However, if someone exchanges real property for more real property, he does not receive cash from the transaction. The investor, in an exchange, has no cash with which to pay tax. By permitting a tax deferral, Congress has given taxpayers the ability to move from one investment directly into another without having to liquidate other investments, or settle for less valuable property.

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