The purpose of an exchange is to defer the payment of taxes on some or all of the capital gain in the property to be exchanged. A taxpayer does not have to look for a party to buy his/her property and acquire a replacement property from the same individual that bought the sale property (a two-party exchange).Although it was required at one time, a taxpayer may sell his/her property to one purchaser and acquire replacement property from another party.An exchange is similar to a sale and a purchase, however, the intent of an exchange, exchange documents and a Qualified Intermediary are necessary elements to effect an IRC 1031.The taxpayer is increasing his selling and buying power by electing to avoid the payment of capital gains tax to the IRS.

The IRS, through Section 1031 of the Internal Revenue Code, recognized that an exchange of like-kind property is not a taxable event. Sec. 1031(a) Nonrecognition of gain or loss from exchanges solely in kind (1) In general, no gain or loss shall be recognized on the exchange property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment. A taxpayer must acquire a property of like-kind which is virtually any type of real property used for business use or investment. A taxpayer may sell vacant land and acquire a warehouse or sell a 3-4 family rental dwelling and acquire vacant land.The property does not have to be similar in nature.Properties can be located anywhere within the United States.A few examples of non like-kind property are stocks, bonds, notes, interests in partnerships, improvements to property currently owned and choses in action. Simply put, like-kind refers to real property for real property as long as it is held for business use or investment.Both the property being sold and the property being purchased should be held by the taxpayer for at least two years and should not be held with the intent of being sold immediately before or after the exchange takes place.

A.Taxpayer/Exchangor cannot have actual or constructive receipt of the sale proceeds.A Qualified Intermediary, a middleman, whom is not an agent of the Exchangor, must hold the proceeds.An attorney, a tax advisor, a broker, an accountant, and family members are all considered agents of the Exchangor and are considered disqualified parties.If the Exchangor has access to the sale proceeds and/or taxable interest accrued on the proceeds, either directly or indirectly through an agent, the funds will become tainted and the exchange corrupted.

B.Utilize a Qualified Intermediary prior to the close of the sale of the Relinquished Property.ESI will prepare the necessary exchange documents for both the Relinquished and Replacement Properties.One of the key documents that needs to be in place prior to the sale closing is the Exchange Agreement between ESI and the Exchangor along with the Acceptance of Assignment and Notice to Buyer for the Relinquished Property.ESI can make the exchange process very simple and keep the Exchangor aware of time deadlines and ensure the Exchangor meets the strict requirements of the Code.

C.Replacement Property must be identified with the Qualified Intermediary within 45 days of the closing of the Relinquished Property.When identifying Replacement Property one of the following rules must be followed:

1)Three-Property Rule:Up to three properties of any value may be identified.The Exchangor can purchase one, or all three properties.

2)Two Hundred Percent Rule:Any number of properties can be identified so long as the aggregate fair market value of all properties identified do not exceed 200% of the sale price of the Relinquished Property

3)Ninety Five Percent Rule:If both above rules are exceeded in the number and value of the properties identified, it will be considered valid if at the end of the exchange, the Exchangor has succeeded in acquiring properties worth an aggregate of at least 95% of the fair market value of all of the properties originally identified.For example, you may identify $1,000,000 in Replacement Property and acquire only $950,000 in Replacement Property.

D.The transaction must be completed by the earlier of (i) 180 days from the date of the first closing or (ii) the due date of the exchangors tax return (including extensions) for the year the Relinquished Property was sold.

A.A mortgage, deed of trust, or other security interest in property, B.A standby letter of credit, C.A guarantee of a third party, or D.Cash held in a qualified trust or qualified escrow.

A.After the end of the 45-day identification period, if there were not any properties identified.

B.After you have received all Identified Replacement Properties.

C.Otherwise, after the end of the 180-day exchange period.