Frequently Asked Questions
What does the term 1031 refer to?
1031 is the number assigned to the Internal Revenue Code Section that
provides for the tax deferred exchange of real and personal property.
What does the term Starker refer to?
It refers to the landmark 1979 federal case entitled, Starker v. U.S.
602 F2d 1341 (9th Cir 1979) wherein the court substantiated the
validity of the delayed exchange process. Prior to the Starker case,
the courts had never sanctioned an exchange whereby the relinquished
property was sold and - at a later date - the replacement property was
What are “Safe Harbors”?
This term refers to the rules established by the 1991 Treasury
Regulations for tax deferred exchanges which provide that - if followed
- the IRS will allow the exchange to qualify.
Why is the tax deferred exchange a popular financial planning
If done correctly, investors defer tax due in connection with the sale
of real or personal property, enabling them to access their equity to
consolidate, diversify, leverage or relocate their investments.
Why use a Qualified Intermediary?
Use of a Qualified Intermediary is sanctioned as a safe harbor by the IRS.
What is like kind?
Real or personal property of the same nature or quality is like kind.
Generally, real property is like kind to all other real property,
except foreign real property, as long as it is held for investment or
for the productive use in a trade or business. Personal Property must be
either the same General Asset Class or Product Class.
How do I properly identify my replacement property?
Property is properly identified only if you unambiguously described it
in a written document signed by you and hand delivered, mailed,
telecopied, or otherwise sent to the person obligated to transfer the
replacement property to you (i.e. the Qualified Intermediary or the
seller of the replacement property) or to any other person “involved in
the exchange” other than you or a person disqualified under Treas. Reg.
Section 1.1031(k)-1(k). Real property generally is unambiguously
described if it is described by a legal description, street address, or
distinguishable name (e.g. the Mayfair Apartment Building). If at the
end of the identification period - 45 days - you identified more
properties than permitted by IRC Section 1031 (k)-1(b)(1) it is treated
as if no replacement property has been identified and the exchange will
What are the 45 and 180 day deadlines?
Beginning with the close of the Relinquished Property, you have 45 days to
identify the properties you intend to purchase and 180 days (or the due
date for your tax return - whichever is earlier) to complete the
acquisition of those properties. In addition, the 45 day identification
period and the 180 day exchange period are calendar days. If the 45th
day or 180th day falls on a weekend or holiday, the deadlines still
apply. There are no extensions for Saturdays, Sundays, or legal
Is there any way to get an extension on the 45 day or 180 day
No extensions are allowed on the 45 day deadline. Your written identification
notice must be signed and dated and sent on or before midnight of the 45th day
after the Relinquished Property closing. With respect to the exchange period, it ends on
the earlier of the 180th day after the Relinquished Property closing or the due date
(including extensions) of your tax return for the taxable year in which the transfer of
the relinquished property occurred. Thus, if the exchange period is cut short by the earlier
occurrence of your tax filing date, you may file for an extension in order to get the full
180 day exchange period.
What is Boot?
Broadly defined, boot is considered:
- “Cash boot” - money received (or not reinvested) by you
during an exchange. If you carry a note for your buyer, the note is also
considered cash boot.
- “Mortgage boot” occurs when you pay off a
loan on the sale of the relinquished property but do not either get a
loan for equal or greater value when you buy the replacement property
or invest additional cash equal to your debt relief. In other words, if
you choose not to get a loan on the replacement property, it is
perfectly acceptable to simply come up with the additional cash
required to purchase the replacement property.
- Any type of replacement property received that is not like kind.
If I own a property with another investor, can I exchange my
equity if he doesn't want to?
Yes. You would want to clearly allocate each investor's interest in the
property before you sell. The investor who wishes to exchange may do
so, and the other investor may receive cash (taxable). It is, however,
very important that the investors be clear on their intentions before entering
into an exchange agreement with a Qualified Intermediary. Once a Relinquished
Property is closed where all investor parties are under one exchange
agreement, they do not have an option of dividing proceeds and buying
separate Replacement Properties.
What is a partial tax exchange?
If the equity in your investment property is $150,000 and you wanted to
use only $100,000 to purchase your replacement property and take
$50,000 out to buy a new car, you would have a partially tax deferred
exchange. The $50,000 cash you took to purchase the car is considered
taxable cash boot.
May I take out my basis and reinvest only the gains?
No. Both basis and gains must be reinvested to defer taxes. The IRS does
not allow you to allocate a portion of the money as basis and a portion
as gain. Any money received by you will be considered boot and taxed at
a capital gain rate.
Can a carry-back note, drawn in the name of the Exchanger, be
assigned to the Qualified Intermediary as part of an Exchange?
No. Once the Note is received in your name, it will be taxable boot.
Alternatively, to use the note as part of the 1031 exchange, the note
and deed of trust must be drawn in the Qualified Intermediary's name.
What is the net value of the property?
Simply stated, the net value is your sales price less your closing
costs. You are responsible for reinvesting both the cash and the loan
amount when you purchase the replacement property. (See section on
How does the note become part of the exchange?
The note must be drawn in the name of the Qualified Intermediary.
During the 180 day exchange period, you have several options in using
the note as part of the exchange:
- Sell the note to a buyer and liquidate it to cash that is then added
to the exchange proceeds and applied to the purchase price of the replacement
- Obtain the agreement of the replacement property seller to accept the
note as part of the purchase price to be paid for the replacement
- Accept only a short-term note (i.e. due in less than 6 months) that will
be paid off in full prior to the acquisition of the replacement property.
Payments received are added to the exchange funds and used to purchase the
I own a piece of property that has my own primary residence as well
as a rental unit, would it still qualify for an exchange?
Yes, so long as you remain consistent with your past tax returns.
Consult with your tax advisor to determine the percentage of the value
of the property you have attributed to investment. You may exchange
that portion of the value.
How long must I hold a property for investment before I can move
into it for my own residence?
The IRS has never established any rule for a required holding period
for investment property to qualify under IRC Section 1031. If you are
considering converting investment property to a principal residence, we
strongly recommend that you consult with your tax advisor.
What does the term “disqualified party” refer to?
The 1994 Treasury Regulations provide that certain persons/entities are
disqualified from acting as a Qualified Intermediary. Disqualified
persons include anyone who can be considered your agent, anyone who is
a related person as defined in the Code, or anyone who bears a
relationship as your agent as described in the Code. Your agents
include anyone who has acted as your employee, attorney, accountant,
investment banker, real estate agent or broker within the previous two
Do I have access to my money during the exchange?
During the exchange transaction your exchange proceeds are placed in an
exchange trust account so that you do not have actual or constructive
receipt of the funds. If you have not identified property, you may not
receive the exchange funds until after the expiration of the 45th day.
If, however, you have identified property but you later decide not to
exchange you may not have access to the funds until the expiration of
the 180 day exchange period. (Some limited exceptions apply.)
What are exchange expenses?
Certain customary expenses incurred in selling the property, which include but
are not limited to the real estate commission, exchange fees, legal
fees and transfer taxes, may be paid with exchange proceeds thereby
reducing the amount that must be reinvested in the replacement