Section 1031 of the Internal Revenue Code
allows an owner of investment property to exchange property
and defer paying federal and state capital gains taxes (20%
federal, varying state, and 25% depreciation recapture), if
they purchase a “like kind” property following the rules and
regulations of the Internal Revenue Code. This allows
investors to use all of the sale proceeds to leverage into
more valuable real estate, increase cash flow, diversify
into other properties, reduce management or consolidate
BENEFITS OF A 1031 EXCHANGE
Single to multiple properties:
• Tax deferral
• Increased income stream
• More tenants yields greater consistency of income stream.
• Can Diversify property types and locations.
• Flexibility in selling individually and paying gains
The real power of a tax deferred exchange
is not just the tax savings, it is also the increase in
purchasing power generated by the tax savings.
WHAT IS “LIKE KIND” PROPERTY?
• Commercial Property
• Raw Land
DOES AN EXCHANGE NEED TO BE SIMULTANEOUS?
A 1031 Tax Deferred Exchange is rarely a two party swap.
Most exchanges are delayed exchanges, whereby the Exchanger
has 180 days between the sale of the Relinquished Property
and the closing of the Replacement Property. They must
identify the potential Replacement Property within 45
calendar days from closing on the Relinquished Property.
It is important that the Purchase and Sale Agreements for
both properties are assignable, and that the Qualified
Intermediary/Accommodator is identified as the seller of the
Relinquished Property and as the buyer of the replacement
WHAT IS A PARTIAL EXCHANGE?
The investor decides to defer some capital gains taxes
and to also recognize some gain by accepting 1)cash
proceeds, 2) a reduction of debt on the replacement
property, or 3) receipt of any property that is not
considered “like kind” such as promissory note*, or other
personal property, all known as “boot.”
This results in some of the gain being recognized and
If the boot is greater than the amount of the capital
gain, then an exchange is not recommended.
*There are ways for Notes to be received and not become
boot, for example, if they are exchanged from the
Relinquished Property to the Replacement Property as part of
the purchase price.
TIMELINES AND PROPERTY I.D. RULES
In an exchange the timeline for completion of exchange
begins on the date of closing of the relinquished property.
If there are more than one property being relinquished, the
first closing establishes the beginning date. It is very
smart, if not necessary, to have the Relinquished Property
sale escrow set up with a contingency for finding new
property, and to have alternate resolutions.
Within 45 days from the closing of the first
Relinquished Property, the Qualified Intermediary must
receive a signed Identification of the Replacement
Property(ies), unambiguously identified by specific address,
APN, or legal description.
200% Rule. The exchanger may identify any number of
replacement properties as long as their total value is not
greater than 2 X the value of the relinquished property.
Value is the purchase price, can be difficult to determine
market value, therefore be careful using comps.
3 Property Rule. The exchanger may identify up to 3
property of any total Fair Market Value.
95% Rule. If the taxpayer identifies properties in
excess of both the 200% and the 3 Property Rules, he must
acquire 95% of the value of all properties identified.
Basis carries over from the original not the last sale. Will
be divided proportionately into all the upleg properties.
Depreciation schedules also carry forward to the new
Sale Agreement and Purchase Agreement must be
assignable. Use CAR form Intent to Exchange.