3 Hr Workbook

Flawless Section 1031 Exchanges for Over 27 Years

Section 1031

For

Real Estate

Professionals

3 Hour Elective Course
Approved by:

The New Hampshire, Vermont &
Maine Real Estate Commissions

It is estimated that 20-25% of the nearly
Edmund & Wheeler, Inc. QI $200B in annual real estate transactions
567 Cottage Street could benefit from a Section 1031
Littleton, NH 0561 Exchange, and that only 3% take
advantage of this powerful tool.
603-444-0020 Edmund & Wheeler, as a Qualified
Intermediary (QI), has been facilitating
www.section1031.com Section 1031 Exchanges for over 27 years.
exchange@section1031.com We have developed “The Power of Section
1031” to provide a solid understanding of
Section 1031 basics and the strategic ways
in which Section 1031 can be utilized and to
assist real estate professionals in
recognizing opportunities for their clients.

© 2008 Edmund & Wheeler, Inc. All rights reserved. The enclosed materials and hypothetical examples are provided for educational purposes only
and do not constitute tax, accounting, legal or investment advice.

Welcome To Section 1031 for Real Estate Professionals. This workbook has been designed to assist you
during the course, and to provide a reference tool for you in the future. The session is broken down into three
sections as described below.

Web references have been made throughout the document so that you can do further topical research as
required. Web references are indicated with a grey arrow. www.section1031.com

If you have follow-on questions or concerns after you complete this course, Edmund & Wheeler is always
available by email at exchange@section1031.com, by phone at 603-444-0020, or on the Web at
www.section11031.com. Our practice provides real estate professionals with Section 1031 consulting at no
charge!

Section 1 provides you with an outline of this course, an introduction
Section
to the Section 1031 Exchange and the essential elements required for
1 successful exchanges.

Introduction &
1031 Basics This section lasts approximately 1 hour and begins on Page 3.

Section 2 contains case studies of the various types of Exchanges as
Section well as real‐life examples of actual transactions that will assist you in
developing your own Section 1031 strategies.
2

Case Studies &
Real-life Examples This section lasts approximately 1 hour and begins on Page 20.

Section 3 outlines the viable alternatives for Exchanges that can be
Section
used for diversification, relocation or the desire of a client wishing to
3 exit from the real estate investment class.

Alternate Exchange
Opportunities This section lasts approximately 1 hour and begins on Page 38.

1 Page Course Summary – “Must Have Section 1031 Concepts”

Summary Commonly used phrases and Section 1031 definitions.

Begins on Page 55
Section 1031
Glossary

© 2008, 2009 Edmund & Wheeler, Inc. All rights reserved. The enclosed materials and hypothetical examples are provided for
educational purposes only and do not constitute tax, accounting, legal or investment advice. 2

Section

1
Introduction &
1031 Basics

Contents
Introduction.................................................................................................................................... 4

About Edmund & Wheeler, Inc. ..................................................................................................... 5

Course Outline .............................................................................................................................. 2

Primary Objectives of This Course................................................................................................ 6

What Is A Section 1031 Exchange................................................................................................ 7

The Five Critical Elements of an Exchange .................................................................................. 7

The Regulation .............................................................................................................................. 7

An Exchange at A glance .............................................................................................................. 8

Section 1031 (a)(1) IRS Code ....................................................................................................... 8

What Are the Benefits of an Exchange? ....................................................................................... 12

The Essential Elements ................................................................................................................ 12

Replacement Property Rules ........................................................................................................ 13

Real Property (What is Like Kind?) ............................................................................................... 14

Personal Property.......................................................................................................................... 15

Timing Is Everything ...................................................................................................................... 16

Can Anyone Handle an Exchange? .............................................................................................. 16

Who Qualifies for an Exchange?................................................................................................... 16

The Qualification Tool ................................................................................................................... 17

The Five Most Common Section 1031 Misconceptions ................................................................ 19


Too many professionals get caught up in the belief that
Section 1031 is only about deferring capital gains. While it
is one of the remaining tax deferral tools available, it’s
actually a LOT about leverage. Clients using what they
would have paid immediately in capital gains taxes to
improve the quality and value of their holdings and plan
for their financial future; is REALLY what Section 1031 is
all about. Section 1031 has been a part of the Internal
Revenue Service Code since 1921!

Look at it as a gift from Uncle Sam, but don’t tell anyone.

Ok, let’s do the math. These numbers suggest that
investors paid the Government over $10B in capital gains
taxes when in fact, they could have used this money in
their own portfolios, interest free, for as long as they
would like. Wait a minute…

Why is this so? We have found that many professionals
that we deal with on a day‐to‐day basis are unclear of the
many strategic uses of Section 1031. Unfortunately, there
are still many that don’t even know of its existence, and
fail to recognize even its most basic uses.

Don’t let your clients find out you didn’t tell them they
could have used this powerful tool.

As real estate professionals, you have a certain
responsibility to your clients regarding the tax
ramifications of their transactions. Holders of investment
real estate should be made aware of the tools that are
available to help them strengthen their real estate
portfolios. Section 1031 is one of the more powerful tools.

We hear over and over again from real estate
professionals how thankful their clients were that they
understood Section 1031 and helped them to explore the
possibilities. Indeed, many of our real estate partners
have saved their clients hundreds of thousands of dollars
in capital gain expense, giving them more money to
invest, while earning multiple commissions in the process!


In 1981, Mr. George Foss, III, our founder and co‐principal was a prominent real estate
broker in Northern New Hampshire. After reading about the concept of a Section 1031
Exchange, he was immediately intrigued, and saw the opportunity to add an interesting twist
to his real estate deals by helping clients to take advantage of this virtually unknown gift
from Uncle Sam.

27 years and thousands of successful exchanges later, George Edmund & Wheeler remains
the foremost authorities on Section 1031 in the New England states, and have completed
exchanges with clients in 48 of 50 states.

The firm has provided Section 1031 education and consulting to hundreds of New England
real estate professionals and has helped them to save their clients over $100 Million in
capital gains taxes.

George Foss, QI John Hamrick, Instructor


This course has been designed to assist you in
becoming proficient in the basics of a Section
1031 Exchange.

An Exchange can be a very complex and time
consuming endeavor. Your QI will understand
all of the mechanics and the myriad of rules and
regulations surrounding an Exchange. Our goal
for this session is to provide you the knowledge
and tools you will require to assist your clients
in recognizing the tremendous opportunities
that Section 1031 provides.

Section 1031 is not just a tax deferral vehicle. It
is a powerful part of your client’s overall
investment strategy, their exit strategy from a
business, and an integral part of their estate
planning.

Bottom line is that the taxes that are deferred
can be used to leverage larger investments,
diversify portfolios and substantially increase
wealth over a period of time.

Don’t worry, we won’t grade you. We want to
take an inventory of what our students know
about Section 1031 prior to the course.

When the course is over, we will re‐take the
quiz, and you will see how far you’ve come in
just a short time.

Good Luck!


Section 1031 fundamentally is about the relocation and
reallocation of your client’s real estate assets, all without
paying capital gains taxes. Relocation could be across the
street, or across the nation. Clients can relocate their
holdings to several markets, creating geographical
diversity. They can also reallocate holdings by combining
multiple holdings into one more valuable property. They
can sell apartment buildings and Exchange for single‐
family housing units, or they can opt for one of the
passive real estate investments available to them and
leave the day‐to‐day management of real estate to a
professional property management team.

Section 1031 exchanges are reported on your tax return
by using Schedule 8824.  It is important that all of the
documentation leading up to and throughout the
exchange is explicit that an exchange is taking place and
not an ordinary sale.  The taxpayer cannot touch the
funds or it will trigger the tax.  The Relinquished Property
and the Replacement property must be
investment/business use property in the taxpayer’s
hands.  All exchanges must be concluded with 180 days.

An exchange is handled in the same manner as a regular
sale with the exception that a third party Qualified
Intermediary (QI) provides the documentation and
handles all funds.


www.section1031.com/PDFs/New PDFs/IRC1031.pdf

Section 1031 (a)(1)

(a) Nonrecognition of gain or loss from exchanges solely in kind

(1) In general

No gain or loss shall be recognized on the exchange of 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.

(2) Exception

This subsection shall not apply to any exchange of—

(A) stock in trade or other property held primarily for sale,

(B) stocks, bonds, or notes,

(C) other securities or evidences of indebtedness or interest,

(D) interests in a partnership,

(E) certificates of trust or beneficial interests, or

(F) choses in action.

For purposes of this section, an interest in a partnership which has in effect a valid election under
section 761 (a) to be excluded from the application of all of subchapter K shall be treated as an interest
in each of the assets of such partnership and not as an interest in a partnership.


(3) Requirement that property be identified and that exchange be completed not more than 180 days after
transfer of exchanged property

For purposes of this subsection, any property received by the taxpayer shall be treated as property which is not
like-kind property if—

(A) such property is not identified as property to be received in the exchange on or before the day which is 45
days after the date on which the taxpayer transfers the property relinquished in the exchange, or

(B) such property is received after the earlier of—

(i) the day which is 180 days after the date on which the taxpayer transfers the property relinquished in the
exchange, or

(ii) the due date (determined with regard to extension) for the transferor’s return of the tax imposed by this
chapter for the taxable year in which the transfer of the relinquished property occurs.

(b) Gain from exchanges not solely in kind

If an exchange would be within the provisions of subsection (a), of section 1035(a), of section 1036(a), or of
section 1037(a), if it were not for the fact that the property received in exchange consists not only of property
permitted by such provisions to be received without the recognition of gain, but also of other property or money,
then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such
money and the fair market value of such other property.

(c) Loss from exchanges not solely in kind

If an exchange would be within the provisions of subsection (a), of section 1035(a), of section 1036(a), or of
section 1037(a), if it were not for the fact that the property received in exchange consists not only of property
permitted by such provisions to be received without the recognition of gain or loss, but also of other property or
money, then no loss from the exchange shall be recognized.

(d) Basis

If property was acquired on an exchange described in this section, section 1035 (a), section 1036(a), or section
1037 (a), then the basis shall be the same as that of the property exchanged, decreased in the amount of any
money received by the taxpayer and increased in the amount of gain or decreased in the amount of loss to the
taxpayer that was recognized on such exchange. If the property so acquired consisted in part of the type of
property permitted by this section, section 1035 (a), section 1036(a), or section 1037 (a), to be received without
the recognition of gain or loss, and in part of other property, the basis provided in this subsection shall be
allocated between the properties (other than money) received, and for the purpose of the allocation there shall be
assigned to such other property an amount equivalent to its fair market value at the date of the exchange. For
purposes of this section, section 1035 (a), and section 1036 (a), where as part of the consideration to the
taxpayer another party to the exchange assumed (as determined under section 357 (d)) a liability of the taxpayer,
such assumption shall be considered as money received by the taxpayer on the exchange.

(e) Exchanges of livestock of different sexes
For purposes of this section, livestock of different sexes are not property of a like kind.


(f) Special rules for exchanges between related persons

(1) In general

If—

(A) a taxpayer exchanges property with a related person,

(B) there is nonrecognition of gain or loss to the taxpayer under this section with respect to the exchange of such
property (determined without regard to this subsection), and

(C) before the date 2 years after the date of the last transfer which was part of such exchange—

(i) the related person disposes of such property, or

(ii) the taxpayer disposes of the property received in the exchange from the related person which was of like kind
to the property transferred by the taxpayer,

there shall be no nonrecognition of gain or loss under this section to the taxpayer with respect to such exchange;
except that any gain or loss recognized by the taxpayer by reason of this subsection shall be taken into account
as of the date on which the disposition referred to in subparagraph (C) occurs.

(2) Certain dispositions not taken into account

For purposes of paragraph (1)(C), there shall not be taken into account any disposition—

(A) after the earlier of the death of the taxpayer or the death of the related person,

(B) in a compulsory or involuntary conversion (within the meaning of section 1033) if the exchange occurred
before the threat or imminence of such conversion, or

(C) with respect to which it is established to the satisfaction of the Secretary that neither the exchange nor such
disposition had as one of its principal purposes the avoidance of Federal income tax.

(3) Related person

For purposes of this subsection, the term “related person” means any person bearing a relationship to the
taxpayer described in section 267 (b) or 707 (b)(1).

(4) Treatment of certain transactions

This section shall not apply to any exchange which is part of a transaction (or series of transactions) structured to
avoid the purposes of this subsection.

(g) Special rule where substantial diminution of risk

(1) In general

If paragraph (2) applies to any property for any period, the running of the period set forth in subsection (f)(1)(C)
with respect to such property shall be suspended during such period.

(2) Property to which subsection applies

This paragraph shall apply to any property for any period during which the holder’s risk of loss with respect to the

property is substantially diminished by—


(A) the holding of a put with respect to such property,

(B) the holding by another person of a right to acquire such property, or

(C) a short sale or any other transaction.

(h) Special rules for foreign real and personal property

For purposes of this section—

(1) Real property

Real property located in the United States and real property located outside the United States are not property of
a like kind.

(2) Personal property

(A) In general

Personal property used predominantly within the United States and personal property used predominantly
outside the United States are not property of a like kind.

(B) Predominant use

Except as provided in subparagraphs (C) and (D), the predominant use of any property shall be determined
based on—

(i) in the case of the property relinquished in the exchange, the 2-year period ending on the date of such
relinquishment, and

(ii) in the case of the property acquired in the exchange, the 2-year period beginning on the date of such
acquisition.

(C) Property held for less than 2 years

Except in the case of an exchange which is part of a transaction (or series of transactions) structured to avoid
the purposes of this subsection—

(i) only the periods the property was held by the person relinquishing the property (or any related person) shall
be taken into account under subparagraph (B)(i), and

(ii) only the periods the property was held by the person acquiring the property (or any related person) shall be
taken into account under subparagraph (B)(ii).

(D) Special rule for certain property

Property described in any subparagraph of section 168 (g)(4) shall be treated as used predominantly in the
United States.


It’s important to understand the difference
between investment property and property
“held for sale.”  Property that is held for sale is
technically inventory in the hands of the
taxpayer and is therefore not eligible for Section
1031 treatment.

Section 1031 Exchanges can be used as a
strategy to achieve tax deferral while changing
the location and the type of property held.  As a
tax‐planning tool, it will achieve greater net
equity over time and increased cash flow.

The Exchange Agreement created by the
Qualified Intermediary will give the QI legal
standing by way of assignment in both the old
property and the new property.  From the
Exchangors perspective, a sale does not occur,
but rather an exchange of properties.  Both
must be used by the taxpayer for investment or
productive use and remember that all real
property is like‐kind to all other real property.


There are three separate rules for identifying Replacement property.  The most common
rule is termed the “3 Property Rule.”  It doesn’t matter how many properties were sold in
an exchange, it is the value that is being matched.  Identifying three properties within the
45‐day deadline will be challenging.  Even if you eventually only select one property, it’s a
good policy to identify more than one so a backup property is available if the first choice
becomes unattainable.

The 200% Rule is available to taxpayers who want to identify and/or acquire more than
three properties.  The limitation in using the 200% Rule is that the total value of what is
identified cannot exceed twice the value (or 200%) of the Relinquished Property.  This
rule works well for larger dollar transactions when the taxpayer wants to diversify the
investment into multiple properties.

The 95% Rule is the most perilous choice.  It will allow the taxpayer to ignore the value
and the number of choices with the requirement that once the properties are identified,
the taxpayer MUST acquire 95% of them.   In nearly 30 years of practice this rule has
been used by a client in only one instance.


The point to remember is that it does not matter the type of real estate that the
taxpayer owns, it is how the property is used in their hands. It must be for investment,
commercial or business use. A single‐family residence is like kind to every other kind of
real property as long as the single‐family residence is NOT personal use property.

These are ALL Like Kind!


When Section 1031 was first codified in 1921, it was for the benefit of farmers who
objected to paying capital gains tax on their farm property, both real and personal.
Certain items of personal property are exchangeable as long as they fall into the same
asset class or product code.   All aircraft is like‐kind to all other aircraft for instance, but is
not like kind to other items of machinery.

The North American Industry Classification System for Sectors 31‐33 is the best sources for
determining like kind for personal property.

www.census.gov/naics
(for a complete description of the allowable categories)


The Exchange will begin on the day the deed is
conveyed to the purchaser.  The 45 day and 180 day
clock will begin.  Contracts for sale and purchase do not
trigger the beginning on an exchange, it always
happens on the day of the first leg of the transaction.
This is also true for reverse exchanges.

Only Presidentially declared disasters would provide for
extension of these time sensitive dates.

The first step is to engage the Qualified Intermediary to
create a written Exchange Agreement.   The QI is
required to have standing in the exchange and this will
be accomplished with an assignment of the contracts.
Specific guidance will be provided to the Settlement
Agent and the funds will be directed to the QI for the
acquisition of the new property.   Most importantly, the
QI will provide guidance to the taxpayer to avoid the
pitfalls.  Transactions with related parties are
prohibited unless certain rules are followed.

Exchanges can be conducted regardless of whether the
taxpayer is an individual or some form of other entity.
It is important to remember that the same taxpayer
must sell and then buy.  The IRS is tracking the taxpayer
identification number.  Single member LLC’s and
revocable trusts will be disregarded for tax purposes.


DOES YOUR SITUATION QUALIFY FOR A SECTION 1031 EXCHANGE
This tool has been developed to help you quickly identify Section 1031 opportunities?

www.section1031.com/PDFs/New PDFs/WhatQualifies.htm

Plans for the Money
The greatest benefit from capital gains
deferral will be obtained by reinvesting
all of the cash from the sale of your
property. It is possible to extract cash at
closing; however, the amount you take
will be subject to tax.

Amount Invested
How did you acquire the property and
how long have you owned it? Did you
purchase it, did you exchange into it, was
it given to you or did you inherit it?
The answers to these and other questions
will determine whether you have a low or
high cost basis, and what your exposure is
to Capital Gains Taxe.

If the gain exceeds $20,000 then an
Exchange should be considered.

Mortgage Balance
The outstanding mortgage debt is paid off
at closing in the same manner as any other closing; and debt paid off must be replaced when the new property is
acquired or new cash added to offset any difference. Any debt relief not offset by new cash will result in taxable
boot.

On Last Two Tax Returns or Vacant Land
Your tax return provides the IRS with an audit trail of your past activity. Your rental property must have appeared
on Schedule “E” of your return (or the corporate equivalent) if you want to portray your property as held for
investment or for use in your Trade or Business. The only exception will be vacant land.

How Long Owned
Dealers are not permitted to use Section 1031; generally their assets are “held for sale”, not “held for
investment”. In order for a property to be considered for long-term capital gain treatment, it must have been
owned by you for at least one year.

Type of Replacement Property
Section 1031 requires that the property be “like-kind”; all real property is like-kind to all other real property.
The Like-kind test is more stringent for personal property.


Choices of Replacement Property
Under the simple rules, you may select
up to three potential new properties
and you can buy any one, two or all
three of them.

More choices are available, however,
the dollar value of the choices is
capped at 200% of the value of the old
property.

Can Meet 45 Day Requirement
After the closing of the old or
Relinquished Property, you will have 45
days to make your formal identification
of Replacement Property choices.
No substitutions are permitted after
the 45th day.

Can Meet 180 Day Requirement
After the closing of the old or Relinquished Property, you will have 180 days to acquire the new or Replacement
Property. Exchanges must be accounted for within the same tax year; often it is necessary to extend the due date
of the tax return to accomplish this task and to get the full benefit of 180 days for a year-end exchange.

Third Party Handling of Money
Receipt of funds by the taxpayer at closing is not permitted in a Section 1031 Exchange. A Qualified Intermediary
must be designated to facilitate this process so that the taxpayer never has constructive receipt of the funds.
Relatives and attorneys or accountants that have represented the taxpayer in the last two years are prohibited
from acting as the Qualified Intermediary.

Have qualification questions?

Edmund & Wheeler, Inc. has provided flawless Section 1031 exchanges for over 27 years. In
fact, Exchanges are our only business. Contact our offices via phone or email if you have any
questions regarding your specific situation.

www.section1031.com/PDFs/New PDFs/WhatQualifies.htm


The Five Most Common Section 1031 Misconceptions

Well before delayed exchanges were codified (by IRS) in 1991, all simultaneous exchange transactions of Real
Estate required the actual swapping of deeds plus the simultaneous closing among all parties to a 1031 exchange.
In most cases these types of exchanges were comprised of many of exchanging parties, as well as numerous
exchange real estate properties. Now today, there's no such requirement to swap your own property with
someone else's property, in order to complete an IRS approved exchange. The rules have been refined and ratified
to the point that the current process is much more indicative of your qualifying intent, rather than the logistics of
the Real Estate property closings

There was a time when all types of exchanges had to be closed on a simultaneous (same day) basis, now they
(1031) are rarely completed in this type of format. As a matter of fact, a majority of the exchanges executed are
closed now as delayed exchanges.

Don’t make this mistake. There is a common misconception that “Like‐Kind” is literal. There are currently 2 types
of properties that qualify as a 'like‐kind': Property held for investment and/or Property held for a productive use,
as in a trade or business.

This statement is a perfect example of another 1031 exchanging myth. Let me repeat, there are no provisions
within either the IRS Code or the US Treasury Regulations that can restrict the amount and number of real estate
properties that can be involved in an exchange. Thus, in exchanging out of several properties into one replacement
property or the vice versa of selling of one property and acquiring several other properties, are perfectly
acceptable strategies and uses of a 1031.

You can take cash out of a Section 1031 Exchange; however, the cash that you take out will be immediately taxable.


Section

2
Case Studies &
Real-life Examples

Contents
Hypothetical Example – Pay Taxes/Defer Taxes.......................................................................... 21

Edmund & Wheeler Case Studies................................................................................................. 24

Case Study 1 – Delayed Exchange .............................................................................................. 25

Real-life Example – Trading a Campground for Several Properties ..................................... 26

Real-life Example – 6 Properties for a Dozen Condos ......................................................... 26

Converting Investment Property into Personal Residence ................................................... 27

Case Study 2 – Reverse Exchange .............................................................................................. 28

Real-life Example – Buying a New Property Before the Old Property Sells ......................... 29

Acquire a Rental Property for a Family Member ................................................................... 29

Case Study 3 – Build-to-suit Exchange ........................................................................................ 30

Real-life Example – Commercial Property for Raw Land with Improvements ...................... 31

Case Studay 4 – Delayed Build-to-suit Exchange ........................................................................ 32

Real-life Example – Industry Specific Building on Identified Property .................................. 33

Case Study 5 – Delayed Exchange, Reverse Format .................................................................. 34

Real-life Example – Acquiring Abutting Property to Primary Residence .............................. 35

The Four Simple Qualification Questions...................................................................................... 36


These two Property Owners have identically valued
properties with identical tax consequences,
however, one chooses to sell and the other chooses
to use The Power of Section 1031, and take an
interest‐free loan from the Federal and State
Government.

These are the assumptions.  The Federal Tax is 15%
and the State Tax is 5%, but past depreciation these
taxpayers have taken will be recaptured at the rate
of 25%.  However, the second Property Owner has
no intention of funding the tax, as a Section 1031
Exchange is planned.  Another assumption is that the
values of the Replacement Properties grow at a
uniform 6% rate per year, without compounding.
After 5, 10 and 15 years we will take a look at each
situation.



OK, here we go.  The two properties both sell for
$300,000, but one Property Owner elects to pay the
tax ($65,000) while the other elects to accept the
interest‐free loan.  They both reinvest, but one has
$65,000 more than the other, and as a consequence,
his investment commands more monthly cash flow.
So the effects of the interest‐free loan are
immediate: The Property Owner who took the loan
earns $325 more per month on his investment than
his tax‐paying counterpart.


Now let’s look at the situation 5 years out.  Each
owner sells his investment, but again Owner #1 pays
the tax while Owner #2 elects to take a further
advance on the interest‐free loan.  Further, since
more principal was invested, the value of the 2nd
Owner’s investment is worth almost $100,000 more
than the 1st Owner’s.  Granted this difference is pre‐
tax, but read on....

At 10 years, the pattern repeats: Owner #1 pays
taxes again, but Owner #2 accepts a further advance
on the interest‐free loan.  This equity is worth
$145,664 more than Owner #1, and, as a
consequence, it commands $728 more income per
month

We conclude the example here, but you get the idea:
By deferring the tax at the beginning, Owner #2 has
made good use of free government money.  This
investment is now worth $221,044, and
consequently commands a monthly income of
$3296, more than $1056 more per month than
Owner #1's income.


And here is a summary of the wealth
building effects.  Owner #2's equity is
worth more than $211,044 than Owner
#1's, and has grown by 119% (instead of
49.3%) thanks to the use of the tax‐free
loan.  Further, at this point, let’s pretend
that Owner #2 takes leave of his senses
and decides to pay the tax instead of
exchanging again and again.

The total taxes due from Owner #2 at the 15‐year point are $136,810, which leaves this owner $74,234
ahead of Owner #1 on an after‐tax basis.  This is the true comparison because, after all, Owner #1 was
paying tax all the way through, and Owner #2 was deferring it, by the use of Section 1031.

At the 15th year, Owner #2 has received an
additional $92,779 in cash flow over Owner #1.
Can any sensible investor afford to ignore these
two figures??

Even after the last sale, if Owner #2 decides to get
out the game and pay his taxes, he is still is over
$160,000 ahead of the game!


Case Studies
Over the many years that Edmund & Wheeler has been facilitating Exchanges, we have discovered that
exchanges generally can be described in 5 distinct types. The most common type is Case Study 1 – the Delayed
Exchange. We will be reviewing each case study, along with some real‐life examples of how these Exchanges
work.
Case
Exchange Type Description
Study

1
Delayed Exchange
In this format, the client gets the most common
(Existing Property) Direct
type of Section 1031 Exchange.
Format

Delayed/Simultaneous
Exchange In this format, property desired by the Exchange
(Existing Property) Reverse
Format
2 client is parked in a Single Purpose Entity (SPE)
until the client's current property can be sold.
(Exchange Last)

Delayed Build-to-suit In this format, the client gets a Section 1031
Exchange
Direct Format
3
Exchange and acquires new, improved
property, built-to-suit.

In this format, property desired by the client is
Delayed/Simultaneous Build-
parked in a Single Purpose Entity (SPE) until the
to-suit
Exchange Reverse Format
(Exchange Last)
4 client's current property can be sold. During the
parking period, the new property is improved by
the SPE to the client's wishes.

In this format, property desired by the client can
Delayed Exchange (Existing
Property) Reverse Format
(Exchange first)
5
be purchased immediately by Client, as Client's old
(Relinquished) property is parked in a Single
Purpose Entity (SPE) until it can be sold to buyer.

www.section1031.com/cases.htm


CASE STUDY 1
ABDC Delayed Exchange
(Existing Property)
Direct Format

In this format, the Client (A) gets a Section 1031 Exchange between steps 3 and 7 assuming all of the
rules have been followed. This is the most common type of exchange.

The Exchange Agreement with
Edmund & Wheeler, Inc. which governs the
overall transaction. This document MUST
be in force before the closing.

The Purchase and Sale Agreement
to sell the Relinquished Property. This step
may take place before Step 1 (the only out-
of-sequence exception).

The closing of the Relinquished Property; if several are involved, the first in chronological order. In this step,
the deed to the property is given to the Buyer.

Rather than going to the Exchangor, the Buyer's funds are used to pay all of Exchangor's expenses
(including mortgages, if any), with the NET going directly to a money center bank into a separate, interest-
bearing account established in the Exchangor's name and Social Security number.

This is an interactive step encompassing all communications post-closing with the Exchangor and Edmund
& Wheeler, Inc. Included are the 45-day Identification Letter, instructions on how much of the account to be
expended on particular properties, and final approval to close on the final choice(s).

These are the precise instructions to Exchangor's attorney, bank or Title Company for the closing of the
Replacement Property, and the wire transfer of approved funding.

This is the Exchangor's receipt of the direct deed from the owner of the Replacement Property (C); the
Exchangor achieves a Section 1031 Exchange between Steps 3 and 7, where in Step 3 a deed is given and in
Step 7 a deed is received, and in between the Exchangor had no control (or Constructive Receipt) of funds.


This Exchangor sold one large lakefront property and
proceeded to use the next 45 days driving up and down
the East Coast selecting Replacement Properties. He was
in the enviable position of being able to identify more than
three Replacement Properties (the simple rule). He used
the 200% rule (to identify as many properties as he
wanted as long as the total value of the properties
identified did not exceed twice the value of the
Relinquished Property). In the end, he acquired sixteen
new properties from Maine to Florida, many of them
single family (rental) residences, including two new
campgrounds.

This Exchange allowed him to diversify his portfolio, generate significant cash flow from his new properties, and pay no
capital gains tax. As they say in the business "one happy camper!" If he determines that one or more of his selections
doesn’t satisfy his investment objectives, then after a year or two, he can exchange again.

We are currently working with a client to acquire a
significant piece of commercial real estate in New England.
The client is in the process of selling six separate pieces of
property in order to aggregate sufficient funds to make the
new Replacement Property purchase. The client has been
extremely careful (with our guidance) to time his sales and
the new purchase all within a 180 day time frame. This is
key to the success of the Exchange due to the fact that he
will acquire not just one piece of property, but rather over
a dozen condominiums. You will recall that you have two
basic rules when it comes to identifying your Replacement
property choices, the Three‐Property Rule and the 200%

Rule. This Exchange is an example of yet a third method of identifying Replacement property. It allows the client to acquire
an unlimited number of properties, without regard to value or number as long as he acquires 95% (FMV) of what he
identified.  This can be a little nerve‐racking for the investor and it pays to have a back‐up plan.


Our client exchanged out of a three unit building that had been held for many years.  In
preparation for retirement, the client acquired a Florida rental property.  After renting
the Florida property for two years, our client will convert the use from rental to personal
and move into the property as a primary residence.  There isn’t any prohibition against
converting business/investment property to personal use.

Be aware that upon the sale of the property, the client will NOT be entitled to the full
Section 121, personal residence exclusion of $250,000/$500,000.  Effective January 1,
2009 the number of years of non‐qualified residential use is divided by the total number
of years owned to produce a pro‐rated exclusion.

For example, if you own a property for 10 years and you rented it for the first two years
of ownership and later moved into it and made it your primary residence, then you would
only be eligible to exclude 80% of the sale, meaning you would owe gains on 20% of the


CASE STUDY 2
ACBD-Delayed/Simultaneous Exchange (Existing Property)
Reverse Format - Exchange Last

In this format, property (C) desired by the client (A) is parked in a Single Purpose Entity (SPE) until
client's current property (A) can be sold. Section 1031 Exchange occurs between steps 7 and 11.

The Exchange Agreement with
Edmund & Wheeler, Inc. which governs the
overall transaction. This document MUST
be in force before the closing.

Since the Replacement Property will be
purchased (and Parked) before the sale of
the Relinquished Property, a source of
funds for the purchase must be
arranged. This can be the Exchangor, or
their bank. If a bank, the Exchangor will be
expected to provide a guarantee.

As Edmund & Wheeler, Inc. is the signer on the Qualified
This is the loan to the Single Purpose Entity (which
Escrow Account, it causes the balance to be paid to the EAT
the IRS has renamed an Exchange Accommodation
in exchange for its deed for the Replacement Property executed
Titleholder (EAT)) that will buy the Replacement Property
in favor of the Exchangor.
from its owner (C) and hold it until the Relinquished
Property (A) can be sold to the Buyer (B).
Before the deed can be issued, however, the EAT must
pay off (or pay down to the extent of available cash) the loan
This is the actual purchase of the Replacement
made to it at Step 3, above.
Property from its owner (C).

This is the Exchangor's receipt of the direct deed from
At this step, the Entity (and not the Exchangor)
the EAT as owner of the Replacement Property; provided the
becomes the legal owner of the Relinquished Property.
deed is delivered to the Exchangor on or before the 180th day.
The 180-day Exchange Period commences.
The Exchangor achieves a Section 1031 Exchange
between Steps 7 and 11, where at Step 7 a deed is given and at
The Relinquished Property goes under Agreement of Step 11 a deed is received, and in between the Exchangor had
Sale to Buyer (B). no control (or Constructive Receipt) of funds.

The Exchangor gives Buyer (B) a deed, and the
transaction closes; this step must occur before the 180th
day, with enough margin to complete Steps 8-11.

Rather than going to the Exchangor, the Buyer's
funds are used to pay all of Exchangor's expenses
(including mortgages, if any), with the NET going
directly to a money center bank into a separate Qualified
Escrow Account established in the Exchangor's name and

Social Security number.


George’s favorite Exchange was an "acquire first,
reverse exchange". Sounds complicated, but it’s not.
Our client had negotiated the purchase of a significant
new property but had been unable to sell a piece of
existing property in time to do the deal. Rather than
jeopardize the purchase, we created a single purpose
entity (SPE), in this case, a Massachusetts trust, to
acquire the new (parked) property.

Edmund & Wheeler, Inc. was engaged to create the
new entity, hold the property until the old property
was sold and the proceeds are available to acquire the
"parked" property.

The Exchangor funded the purchase with his own and other bank resources. Once the old property was sold, the new
property was deeded to the Exchangor. Since it is not permissible to own the old and new property at the same time, this
strategy accomplished the Exchangor’s desired outcomes, again without capital gains tax.

This is a case where you can benefit your own family
without paying capital gains tax.  Our client sold a
multi‐family rental property that had been owned for
many years and rented to college students.  The cash
flow was OK but there was deferred maintenance that
was starting to affect the market price of the property.

Our client negotiated a sale on the multi‐family
property and engaged us to handle the transaction as a
Section 1031 Exchange.  The client’s daughter had
moved to a suburb of Chicago and wanted to acquire a

property that would be a safe secure primary residence and provide her mom with a nice place to visit the grandchildren.
A property was identified and the exchange funds were used to acquire the new suburb property.  As long as the property
remains as rental property in the hands of the client and fair market rent is charged, then this strategy is perfectly
acceptable.  The property can be gifted off in increments of $12,000 per person, per year.


CASE STUDY 3
ACBD-Delayed, Build-to-Suit (or Improvement) Exchange
Direct Format

In this format, client (A) gets a Section 1031 Exchange between steps 3 and 12
and acquires new, improved property. All rules MUST be followed.

The Exchange Agreement with Edmund &
Wheeler, Inc. which governs the overall
transaction. This document MUST be in force
before the closing.

The Purchase and Sale Agreement to
sell the Relinquished Property. This step may
take place before Step 1 (the only out-of-
sequence exception).

The closing of the Relinquished Property; if several The vendors begin work, and soon enough, bills begin to
are involved, the first in chronological order. In this step, arrive, addressed to the EAT, the legal owner of the property.
the deed to the property is given to the Buyer. This step
starts the 45-day Identification Period and the 180-day
All invoices are presented to the Exchangor for approval
Exchange Period.
for payment from the Account.

Rather than going to the Exchangor, the Buyer's
Upon such approval, further advances are made by the
funds are used to pay all of Exchangor's expenses
QI to the EAT to cover each payment.
(including mortgages, if any), with the NET going
directly to a money center bank into a separate, interest-
bearing Qualified Escrow Account established in the The vendors are timely paid, until funds are exhausted.
Exchangor's name and Social Security number.

This is the Exchangor's receipt of the direct deed from
The Exchangor has identified property C (property the EAT as owner of the Replacement Property; provided the
needing improvements) as the Replacement Property; at deed is delivered to the Exchangor on or before the 180th day
this Step, Edmund & Wheeler, Inc. causes the necessary (as adjusted), the Exchangor achieves a Section 1031
purchase price for this property to be advanced to the Exchange between Steps 3 and 12, where at Step 3 a deed is
Single Purpose Entity (which IRS has renamed an given and at Step 12 a deed is received, and in between the
Exchange Accommodation Titleholder (EAT)) which has Exchangor had no control (or Constructive Receipt) of funds.
been formed to own and improve the identified
Replacement Property.

This is the closing for Property C; this Step is the
funding; and

This Step is the legal acquisition. At (or hopefully
well before) this time, Exchangor engages Contractors and
Materialmen to effectuate the desired improvements.


This is a classic "build‐to‐suit" transaction. Our client sold a commercial property and
directed the proceeds of the sale by virtue of an Exchange Agreement to us as
Qualified Intermediary. We created a single purpose entity to conduct the business,
in this case a NH corporation. We then purchased, in the name of the new
corporation, a piece of raw land (which had been subdivided and permitted) using
the exchange proceeds. The client delivered specific instructions for the type of
building to be constructed on the site and directed who the contractor would be to
perform the work. We made a series of progress payments based on the work in
place and the "ok" to pay by the client.

Once all of the sale proceeds of the Relinquished Property were exhausted, the new
property was deeded to the client and the corporation was closed and tax return
filed on its behalf. The entire process was concluded within 180 days.


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