THE PROCESS

BASIC REAL ESTATE EXCHANGE ISSUES

Internal revenue code Section 1031 provides that no gain or loss is recognized where a taxpayer exchanges property used in a trade or business or held for investment solely for like kind property used in a trade or business or held for investment. If the taxpayer receives cash or other than like kind property, gain will be recognized to the extent of the value of the other property or money, commonly called “boot”, received by the taxpayer. In the real estate investment area, S1031 can be a boon. Rather than sell an investment property and purchase a new investment property, a taxpayer can utilize the provisions of IRC S1031 and defer the recognition of the gain. This deferral allows the investor to purchase that much more property since no taxes will be paid as a result of the disposition of the first property.

The likelihood that a person who wants to exchange his/her investment three family house for an office building will find an owner of an office building who wants a three family house is non-existent. The solution is the use of a Qualified Intermediary (QI). By utilizing the services of a QI, the exchange transaction is nothing more than the sale of the existing property and the purchase of the desired property.

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The use of QI simplifies the exchange process to nothing more than a sale and a purchase. In fact, but for a clause referencing the exchange to be included in the contract of sale for the existing property and the contract for the replacement property, neither buyer nor seller has any involvement in the exchange process.