FORWARD EXCHANGES

Forward exchanges of real estate are the most common forms of tax-deferred exchanges. See attached chart. Section 1031 contains the following requirements:

• The property which you are selling, referred to as the Relinquished Property, must be held by you for investment or for use in your trade or business. There is no authority on how long a property must be held to meet this requirement.

• Land is a good example of an investment property. Rental properties and factories are good examples of property used in a trade or business. Your personal residence can never be eligible for Section 1031 deferral.

• The eligible property must be disposed of in an exchange transaction, usually employing the services of a Qualified Intermediary such as Century 1031 Exchange Inc.

• The cash proceeds from the sale are held by the Qualified Intermediary. Prior to the completion of the exchange the taxpayer gives up the right to actual or constructive receipt of the money and any interest earned on the money except under certain circumstances.

• Within 45 days after the Relinquished Property is sold, the taxpayer must designate which Replacement Properties he intends to purchase, whether or not he is then under contract to purchase any Replacement Property. The 2 most commonly-used rules for designation of Replacement Property are the 3-Property rule, permitting the taxpayer to designate any 3 properties, regardless of their value, and the 200% rule, permitting the taxpayer to designate any number of properties, so long as their value does not exceed 200% of the value of the Relinquished Property.

• Within 180 days after the Relinquished Property is sold, the taxpayer must complete the acquisition of the Replacement Property or Properties.

• To avoid what is commonly referred to as "boot," i.e., taxable gain, the taxpayer has to reinvest all cash proceeds and acquire Replacement Property with at least as much debt as the Relinquished Property. If the Replacement Property has less debt than the Relinquished Property, the taxpayer can "add cash" to reduce or eliminate boot.

FORWARD EXCHANGE DIAGRAM

1. Taxpayer and Century 1031 Exchange Inc. enter into an Exchange Agreement.


2. Taxpayer, pursuant to the Exchange Agreement and at Century 1031 Exchange Inc.'s direction, deeds the Relinquished Property directly to Buyer.


3. Buyer pays Century 1031 Exchange Inc. the cash consideration for the Relinquished Property.


4. Century 1031 Exchange Inc. pays the Seller of the Replacement Property.


5. The Seller of the Replacement Property, at Century 1031 Exchange Inc.'s direction, conveys the Replacement Property to Exchange Party to close out Exchange.

REVERSE EXCHANGES & CONSTRUCTION EXCHANGES

• In a Reverse Exchange transaction, the Replacement Property is acquired before the Relinquished Property is sold. In 2000, the IRS published a Revenue Procedure creating safe-harbor rules for Reverse Exchanges. Even the most straight-forward Reverse Exchanges are complicated transactions. The principals of Century 1031 Exchange Inc., without doubt, have more experience than anyone in the country in structuring Reverse Exchanges and addressing issues raised by lenders and others.

• In a construction exchange, prior to transferring the Replacement Property to the taxpayer, improvements are made to the Replacement Property using the proceeds of the sale of the Relinquished Property.

• To learn more about Reverse Exchange transactions and Construction Exchanges, click here.