Pictured: Frio Town Ranch, Frio County
1. Purchase like-kind Replacement Property of equal or greater value than the Relinquished Property (buy equal or greater in value). 2. Reinvest all of the net equity (exchange funds) from the sale of the Relinquished Property into the Replacement Property (spend all of the net equity); and 3. Replace the value of the debt paid off on the Relinquished Property with cash (from outside of the exchange) or debt placed on the Replacement Property. As a practical matter, satisfying the first two rules, buying equal or greater value property and reinvesting all of the exchange funds, will result in the debt requirement being satisfied. Partially Tax Deferred Exchanges I sold for $100,000 but I cannot defer my taxes since the new property I plan to purchase has a sales price of only $92,000. Therefore, I cannot defer my taxes via a 1031 Exchange. FALSE A 1031 Exchange does not need to be an all or nothing proposition. A partially tax deferred 1031 Exchange is valid. If you purchase property lower in value or take a portion of the cash from the closing of the sale and do not reinvest all of your exchange proceeds, you will have a partially tax deferred exchange. You will pay taxes on the “boot”, which are those funds not reinvested or debt replaced. At times, a partial exchange may be advantageous to an Exchanger. Depending on your circumstances, it’s a strategy worth discussing with your legal and tax advisors.
Identification Rules It doesn’t really matter that I did not identify any property for my exchange within 45 days if I eventually purchase a new property and follow the other rules. FALSE The rules under section 1031 are very strict. If you do not identify any property within the identification period, your exchange will fail. There are no exceptions. It is important to remember from the day your Relinquished Property transfers, you have 45 calendar days to identify potential Replacement Property using the 3 Property Rule (most common), 200% Rule or 95% exception. You can change your identification at any time before the expiration of the 45-day identification period, but not after it expires. The statute is very clear, to be eligible for deferral under section 1031, the like-kind property must be identified within 45 calendar days and acquired within 180 calendar days from the transfer of the Relinquished Property. Penalties The IRS will penalize me for not completing an exchange. FALSE If you set up your sale as a 1031 Exchange and cannot locate new property to complete your exchange, you will not be penalized by the IRS, nor by IPX1031. The exchange simply “fails”, and you will pay the same taxes as if you had never attempted to complete a 1031 Exchange. However, there are strict rules in the 1031 regulations as to how long you will need to wait before IPX1031 can return your funds to you. COORDINATES | PAGE 31
