1031 Exchange Basics

IRC 1031 (a)(1)

"...No gain or loss is recognized where property held for productive use in a trade or business or for investment is exchanged solely for property of like-kind which is to be held for productive use in a trade or business or for investment."

Qualifying Property

Must be held:

For Investment Purposes OR
For Productive Use in a Trade or Business

Non-Qualifying Property

Must NOT be:

Used as Primary Residence or Vacation Home
Held primarily for Sale (Development Land)

Examples:

Stocks in trade or other property held primarily for sale
Stocks, Bonds, Notes, or Other Securities
Interests in Partnerships
Foreign Property - IRC Section 1031 (h)

Like Kind Real Estate

Like Kind*	Not!
Vacant Land Rental Property Retail Residential Office Industrial Aircraft Easements Mineral Rights Leases, 30 yrs or more	Already Owned Pre-paid or escrowed materials or construction services Partnership Interests Principal Residence Foreign Real Estate REIT Stocks, Bonds, or Notes Dealer Property

*Must be used in a trade or business or for investment

Napkin Test

To be a fully tax deferred 1031 exchange, the replacement property must be:

Equal or Greater in Value
Equal or Greater in Equity

Greater Equity, But Equal Value

	Relinquished	Replacement
Value	$1,000,000	$1,000,000
Debt	$500,000	$400,000
Equity	$500,000	$600,000

NOTE: $500K debt on relinquished property is offset by the $400K of new Debt and $100K cash added = No Taxable Boot from 1031 Exchange

Equal Equity, But Greater Value

	Relinquished	Replacement
Value	$1,000,000	$1,100,000
Debt	$500,000	$600,000
Equity	$500,000	$500,000

NOTE: $500K debt on relinquished property is 100% offset by the $600K of new Debt = No Taxable Boot from 1031 Exchange

Equal Equity, But Lower Value

	Relinquished	Replacement
Value	$1,000,000	$900,000
Debt	$500,000	$400,000
Equity	$500,000	$500,000

NOTE: A portion of the $500K debt on relinquished property is offset by the $400K of new Debt = $100K of Taxable Boot from 1031 Exchange

Lower Equity, But Equal Value

	Relinquished	Replacement
Value	$1,000,000	$1,000,000
Debt	$500,000	$600,000
Equity	$500,000	$400,000

NOTE: All of the $500K debt on relinquished property is offset by the $600K of new Debt, but the $100K received as CASH is not offset by the Increased Debt of $600K = $100K of Taxable Boot from 1031 Exchange