IRC ß1031 Doís and Doníts


 

Do advanced planning.  Advanced planning is key to success in any exchange particularly in relation to timing of the sale of the relinquished property, estimating equity and debt replacement objectives to avoid boot, and retaining a quality qualified intermediary.

Do not be tardy on your identification and exchange deadlines.  The IRS will not honor the exchange if either the 45 day identification period in missed or replacement property is not acquired within the 180 day exchange period.

 

Do make every effort to sell your property before you purchase.  If you identify an ideal replacement property before your relinquished property is sold then you may have to negotiate a reverse exchange (i.e. buying before selling).  The IRS has provided guidance on this type of reverse exchange in Revenue Procedure 2000-37 but a reverse exchange is considered a more aggressive type of exchange as either the replacement property or the relinquished property must be parked with an Exchange Accommodator Titleholder (EAT) for 180 days pending the successful completion of the exchange.

 

Do not change how title to your property is being held or dissolve partnerships during the exchange.  This may cause the exchange to be dishonored due to holding period issues

 

Do be mindful of the "napkin test" in planning a balanced exchange to eliminate the possibility of taxable boot.  The two components of the napkin test are:

  1. If you exchange for like-kind property and are trading down in total value, you are potentially taxable to the extent of the trade down; and

  2. If you are exchanging like-kind property and you are trading down in equity, you are potentially taxable the extent of the trade down.

For more information on this matter or if we may be of further assistance please contact us for a free consultation by calling us at 1 (800) 781-1031 or (714) 939-1031 or by e-mail at info@cornerstoneexchange.com

Security investments offered through Sandlapper Securities, LLC. (Member FINRA, SIPC)