1. What is a like-kind exchange?

2. What are the advantages of a like-kind exchange?

3. Are there disadvantages to an exchange?

4. What are the essential requirements of an exchange?

5. What kinds of property are subject to Section 1031?

6. What about the forty-five (45) day rule?

7. Can an identification be revoked?

8. What is the three property rule and the 200% rule?

9. Are there any problems with the forty-five (45) day rule?

10. What is the 180 day rule?

1. What is a like-kind exchange?
A like-kind exchange is a tax transaction where you transfer property used in a trade or business or held for investment for other property of a like-kind also held for use in trade or business or for investment. This can be accomplished without the payment of tax. These transactions are also called 1031 exchanges or tax free exchanges.

2. What are the advantages of a like-kind exchange?
The principal advantage is, if structured correctly, there will be no tax upon the gain represented on transfer of the taxpayer's property. The tax can instead be invested in additional property. In other words, the entire equity in the property can be utilized to purchase other property.

3. Are there disadvantages to an exchange?
There are disadvantages to an exchange. The basis that the taxpayer possesses in the property which they are exchanging carries over into the exchanged property. The basis may be increased by certain costs. On account of the legal requirements of an exchange, additional fees can be incurred in an exchange. Lastly, the proceeds on an exchange can only be used to acquire certain kinds of property and may not be utilized by the taxpayer for other purposes without incurring a tax.

4. What are the essential requirements of an exchange?
There are two essential requirements.

• Property subject to Section 1031 (commonly called "relinquished property") must be exchanged for property of a like-kind which is also subject to Section 1031 (commonly called "replacement property").
• Each of the properties exchanged must have been held by the taxpayer for investment or for use in a trade or business.

5. What kinds of property are subject to Section 1031?
Generally any property of a like kind, whether real or personal, can be exchanged. Real property is real estate, improvements, and items attached to real estate and improvements. Personal property is other kinds of property such as airplanes, cars, computers, etc. Certain properties do not qualify for Section 1031. These are:

• Stock in trade or other property held primarily for sale
• Stocks, bonds or notes;
• Other securities or evidences of indebtedness or interest
• Interest in partnerships
• Certificate of trust or beneficial interest
• Chooses in action (basically-lawsuits)

6. What about the forty-five (45) day rule?
In an exchange, any replacement property received by the taxpayer is treated as property which is not like-kind if that replacement property has not been identified within a forty-five (45) day period. This period begins on the date the taxpayer transferred taxpayer’s property and ends at midnight on the forty-fifth (45th) day thereafter. There are no extensions to this period. So, for example, if the period ends on Sunday, the taxpayer would be well advised to identify the property on Friday or Saturday.

For these purposes, replacement property is identified when it is designated in a written document signed by the taxpayer and hand delivered, mailed, faxed or otherwise sent to either the person obligated to transfer the replacement property and the other person involved in the exchange other than the taxpayer, his agent, or other disqualified persons. The property must be unambiguously described in the document.

7. Can an identification be revoked?
Absolutely. It must occur before the end of the identification period and must be done in the same fashion as the identification. So it must be done in writing, signed by the taxpayer and delivered, mailed, faxed or otherwise sent before the end of the identification period to the same people to whom the identification was originally sent.

8. What is the three property rule and the 200% rule?
The regulations provide for some limitations on the identification of replacement properties. The two rules most commonly used are the three property rule and the 200% rule. The three property rule allows a taxpayer to identify as replacement properties any three properties without regard to the fair market value of those properties. The 200% rule allows a taxpayer to designate any number of properties as long as they are aggregate fair market value at the end of the identification period do not exceed 200% of the fair market value of the taxpayer’s property or properties which are involved in the exchange.

9. Are there any problems with the forty-five (45) day rule?
Yes, surprisingly, there are a number of pitfalls in what is a seemingly easy system. The first major pitfall is to recognize that forty-five (45) days is not a long period of time in order to identify property which taxpayer will subsequently have to buy. It is unwise to wait until the taxpayer’s property is sold to begin to look for replacement property. Once one has decided to attempt an exchange and taxpayer’s property is listed, it would be a very wise idea to start earnestly looking for replacement property.

With respect to use of the identification of replacement property, the 200% rule may require appraisals of both the taxpayer’s property and the replacement property to assure the 200% evaluation is not exceeded.

Many people utilize the three property rule for identification purposes and usually it is easy to apply. However, not to emulate former President Clinton, but what exactly a “property” is can be difficult to ascertain. As an example, suppose taxpayer owns an apartment building which taxpayer sells. Taxpayer identifies an eight story office building newly constructed by Developer A. However, prior to knowing the taxpayer’s interest, Developer A had condominiumized each floor of the building contemplating a sale to each of eight owners. For purposes of the three property rule, the question arises as to whether that is a single or property or eight properties.

10. What is the 180 day rule?
This rule involves the receipt of the properties of which have been identified. The taxpayer must receive those properties by the end of 180 days after the transfer of the taxpayer’s property or the date on which the taxpayer must file a tax return including extensions, whichever is earlier. Furthermore, the property received must be substantially identical to the property that has been identified.