Frequently Asked Questions
( FAQs)

What is a 1031 Exchange?

A 1031 Exchange is a transaction in which a taxpayer is allowed to sell one property
and buy another without a tax consequence. This can be done through a Delayed,
Reverse, Simultaneous Exchange, to name a few. This type of tax deferred transaction
is authorized by section 1031 of the Internal Revenue Code. It is the best strategy for
the deferral of capital gains tax that would ordinarily arise from the sale of investment
real estate.

Why consider an Exchange?

An Exchange can provide the Real Estate Investors 100% of the proceeds from
the sale of real property to purchase a new property; thereby deferring the capital
gains taxes and income taxes. Real Estate Investors can accomplish virtually any
investment objective with 1031 Exchanges including greater leverage, diversification
of properties, improve cash flow and return on capital invested, geographic
relocation, and/or property consolidation.

How does an Exchange work?

A 1031 Exchange is a three-way exchange, referred to as a “Starker Exchange,”
in which a Qualified Intermediary (QI) is used to facilitate the transaction.
There are four basic steps:
     1. Investor arranges for sale of property and includes exchange language in the
         sales contract.
     2. At closing, sales proceeds go to a Qualified Intermediary for a 1031 Exchange.
     3. Investor must identify potential exchange properties within 45 days of the
         escrow closing.
     4. Seller completes 1031 Exchange within 180 days of the escrow closing on the
         property originally relinquished.

These steps may occur simultaneously. Preferably, before you relinquish your property, you need to consider what type of replacement property will be suitable most commonly known as a Delayed Exchange.

What is Like-Kind Property?

Like-Kind refers to the type of property being exchanged. You can exchange any real
estate investment for any other type of real estate investment – for example, vacant
land can be exchanged for rental property. In most cases your personal residence is
not Like-Kind investment property.

What is Exchanging Up?

To accomplish a fully tax-deferred exchange the rule of thumb is… exchange even
or up in value. This applies to both value, equity and debt.

What is Boot?

Boot is equity or debt not traded up Into the replacement property. To the extent that
you do not exchange even or up in value and/or exchange even or up in equity and
debt, you will have received non-qualifying property (“boot”) in your exchange. If boot
is received, tax is computed on the amount of gain on the sale or the amount of boot
received – whichever is lower.

Who should I discuss the Exchange with?

Do advanced planning for the exchange. Talk to your accountant, attorney, broker, financial planner, lender and qualified intermediary.

Are the timing deadlines important?

DO NOT miss your identification and exchanges deadlines. Failure to identify within the 45 day identification period or failure to acquire replacement property within the 180 day exchange period will disqualify the entire exchange. Reputable Intermediaries will not act on back-dated or late identifications.

Are there basic rules I should remember?

There are three basic rules to qualify for complete tax referral:
     •Relinquish and receive only “Like-Kind” replacement property
     •Exchange Up – Use all proceeds from the relinquished property for purchasing
      the replacement property.
     •Make sure the debt on the replacement property is equal to or greater than the
      debt on the relinquished property.

Can anyone act as a Qualified Intermediary?

NO – DO NOT try doing a 1031 exchange yourself. Do not use your attorney or CPA
to hold title or funds. IRS regulation requires a qualified intermediary to properly
complete an exchange. Call us for the name of one that operates in your area.

Should I choose my new replacement property first?

Because the 45 day window to identify replacement is critical, you should attempt
to identify suitable replacement properties before you relinquish. Occasionally
exchangers find the ideal replacement property before a buyer is found for the
relinquished property. If this situation occurs, a “reverse” exchange (buying before
selling) may be necessary.

Can I change how I hold title?

DO NOT dissolve partnerships or change the manner of holding title during the
exchange. A change in the exchanger's legal relationship with the property may
jeopardize the exchange.