This document provides an overview of like-kind exchanges under Internal Revenue Code Section 1031. It discusses the key requirements for completing a tax-deferred like-kind exchange, including using a qualified intermediary, identifying and purchasing replacement property within the required timeframes, and restricting rights to receipt of proceeds. It also summarizes some of the common types of real property and personal property that qualify for like-kind exchange treatment.

1. 1031s:101
Nuts & Bolts of
Like-kind E h
Lik ki d Exchanges

2. Rick Chess, Esquire
q
Chess Law Firm
David Gorenberg, Esquire, CES®
Gorenberg Esquire
Citibank 1031 Exchange Service

3. Important Disclosures
This presentation does not constitute legal or tax advice. Citibank and its
employees do not provide tax or legal advice and are not responsible for
advising customers on the laws or regulations pertaining to any 1031
exchange transaction. Citibank and its employees will not make any
representations regarding the tax consequences of any 1031 exchange
transaction. It is the customer’s responsibility to seek tax and legal advisors in
connection with any 1031 exchange transaction.
IRS Circular 230 Disclosure: To the extent that this material or any
y
attachment concerns tax matters, it is not intended to be used and cannot be
used by a taxpayer for the purpose of avoiding penalties that may be imposed
by law.
Citibank, N.A.,
Citibank N A Member FDIC Citibank and Arc Design is a registered
FDIC.
trademark of Citigroup Inc.

4. Why Exchange?
4 ©2012 David Gorenberg & Rick Chess

5. Taxation 101
• Generally, all income is taxable, unless specifically exempted
y, , p y p
by law.
• Even illegal income, such as stolen or embezzled funds, must
be reported on Line 21 of Form 1040.
Source: Department of Treasury, Internal Revenue Service,
Publication 525.
5 ©2012 David Gorenberg & Rick Chess

6. IRC Section 1031
• “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 for productive use in a trade or
business or for investment.”
• §1031 provides for deferral of taxes,
not complete elimination.
6 ©2012 David Gorenberg & Rick Chess

7. §1031 in a Nutshell
To obtain complete deferral of capital gains taxes,
the taxpayer should:
•Purchase replacement property that is equal or greater in value
to th
t the relinquished property
li i h d t
•Have equal or greater equity in the replacement property
•Have equal or greater debt on the
replacement property
l t t
•Receive nothing except like-kind property
•Avoid constructive receipt of exchange proceeds
•Use a qualified intermediary
7 ©2012 David Gorenberg & Rick Chess

8. Like-Kind Property
Foreign real property is not like-kind to U.S. real property.
8 ©2012 David Gorenberg & Rick Chess

9. Time Restrictions
• 1984 Congress amends Section 1031
- 45 day identification period
- 180 day exchange period runs concurrent
- Or due date of tax return, whichever is earlier
- Calendar days not business days
days,
- No extensions
Identification
Period
Exchange
Period
Day
D 0 Day
D 45 Day
D 180
9 ©2012 David Gorenberg & Rick Chess

10. Identification Requirements
•Signed by taxpayer, and in writing
•Delivered
•QI or seller of replacement property
•Unambiguously described
g y
•Legal description
•Street address
•Distinguishable name (e.g., Mayfair
Apartment Building)
•May be revoked or amended, with same
May amended
formality as above
10 ©2012 David Gorenberg & Rick Chess

11. Identification Rules
3 Property Rule – up to 3 properties, without
properties
regard to FMV;
or
200% Rule – any number of properties, so
long as aggregate FMV does not exceed
200% of FMV of relinquished properties;
but
95% Exception – if first two rules violated,
must acquire 95% of FMV of all identified
properties
11 ©2012 David Gorenberg & Rick Chess

12. Less-than-Fee Interests
in Real Property that Qualify for Exchanges
• Leases with at least 30 years remaining,
including renewal options
• Vendee’s interest in a land sale contract; not the
vendor s
vendor’s interest
• Undivided interest in one property for an
undivided or 100% interest in another property
• Remainder interest in real property
• Timber rights, riparian rights,
mineral rights
i l i ht
– As determined by state law
12 ©2012 David Gorenberg & Rick Chess

13. Common Less-than-Fee Exchanges
• Timber Rights • Tenants in Common
• Mineral Rights • Transferrable Development
• Oil Rights Rights
• Riparian Rights
Ri i Ri ht • Others
13 ©2012 David Gorenberg & Rick Chess

14. Like-Kind Personal Property
• Livestock of the same sex
• Automobiles for automobiles
• Buses for buses
• Manufacturing equipment for manufacturing
equipment
• 13 general asset classes; OMB Standard Industrial
Classification (SIC) Manual identifies 4-digit product
classes; New North American Industry Classification
System (NAICS) is 1400 pages
• Exchanges within product class
14 ©2012 David Gorenberg & Rick Chess

15. Equipment Exchanges
q p g
≈
≈
15 ©2012 David Gorenberg & Rick Chess

16. Common Personal Property Exchanges
•Aircraft
Ai ft
•Artwork
•Collectibles
•Equipment
•Fleet Vehicles
•Intellectual Property
•Licenses, Franchises, Patents, Trademarks
•Livestock
•Others
16 ©2012 David Gorenberg & Rick Chess

17. Common Personal Property Exchanges
-F
Franchises often sold with Real Estate
hi ft ld ith R l E t t
•FFranchises may be exchanged
hi b h d
for other franchises
• Nature of the franchise must also
be like-kind
• Re/Max is not like-kind to
Ramada
• Re/Max is like-kind to
Century 21
17 ©2012 David Gorenberg & Rick Chess

18. Oil, Gas & Mineral Exchanges
Estates in Land:
-Fee Simple: owner is entitled to the entire property,
Fee
without conditions, in perpetuity
-Mineral Estate: owner is entitled to only the mineral
interests in the property, in perpetuity
-Mineral Lease: lessee is entitled to explore for and
remove minerals from the property, usually for a finite
term or until the minerals have been exhausted
-Mineral Royalty: the right to receive income from the
minerals recovered by the lessees
For 1031 exchange purposes, taxpayers
may exchange among these interests freely
18 ©2012 David Gorenberg & Rick Chess

19. Regulations 1.1031
- safe harbors
• 1.1031(k)-1(g)
– (2) Security or Guarantee Arrangements
• Determination of whether the taxpayer is in actual or constructive receipt
of the exchange funds is made without regard to existence of mortgage,
standby letter of credit, third party guarantee, etc.
– (3) Qualified Escrow Accounts and Qualified Trusts
• Determination of whether the taxpayer is in actual or constructive receipt
of the exchange funds is made without regard to whether the funds are
held in a Qualified Escrow Account or Qualified Trust
– QEA – Escrow holder is not a disqualified person; escrow
agreement contains “(g)(6)” limitations
t t i “( )(6)” li it ti
– QT – Trustee is not a disqualified person; trust agreement contains
“(g)(6)” limitations
– (4) Qualified Intermediary
– QI is not considered an agent of the taxpayer; is not a disqualified
person; QI enters into “exchange agreement” that contains the
“(g)(6)” limitations
– (5) Interest and Growth Factors
• Determination of whether the taxpayer is in actual or constructive receipt
of exchange funds is made without regard to the fact that the taxpayer is
or may be entitled to receive any interest or growth factor with respect to
the deferred exchange.
19 ©2012 David Gorenberg & Rick Chess

20. Regulations 1.1031
- (g)(6) Limitations
• (i) An agreement limits a taxpayer's rights as provided in this paragraph
(g)(6) only if the agreement provides that the taxpayer has no rights
rights,
except as provided in paragraphs (g)(6)(ii) and (g)(6)(iii) of this section, to
receive, pledge, borrow, or otherwise obtain the benefits of money or
other property before the end of the exchange period.
• (ii) The agreement may provide that if the taxpayer has not identified
replacement property by the end of the identification period the taxpayer
period,
may have rights to receive, pledge, borrow, or otherwise obtain the
benefits of money or other property at any time after the end of the
identification period.
• (iii) The agreement may provide that if the taxpayer has identified
replacement property, the taxpayer may have rights to receive, pledge,
borrow, or otherwise obtain the benefits of money or other property upon
or after
– (A) The receipt by the taxpayer of all of the replacement property to
which the taxpayer is entitled under the exchange agreement, or
– (B) The occurrence after the end of the identification period of a
material and substantial contingency that –
• (1) Relates to the deferred exchange,
• (2) Is provided for in writing, and
• (3) Is beyond the control of the taxpayer and of any disqualified
person ( defined in paragraph (k) of thi section), other th
(as d fi d i h f this ti ) th than
the person obligated to transfer the replacement property to the
taxpayer.
20 ©2012 David Gorenberg & Rick Chess

21. Federal Regulations of QIs
21 ©2012 David Gorenberg & Rick Chess

22. State Regulation of QIs
• Enacted • Pending
– California – Arizona
– Colorado – New Jersey
– Connecticut – Oklahoma
– Idaho – Texas ≈ Bill Died
– Maine
– Nevada
– Oregon
– Virginia
– Washington
22 ©2012 David Gorenberg & Rick Chess

23. Your Questions
23 ©2012 David Gorenberg & Rick Chess

24. Contact Information
David Gorenberg, Esquire Richard B. "Rick" Chess, Esquire
Certified Exchange Specialist® Managing Partner
Director, 1031 Exchange Services
Citibank, N.A. Chess Law Firm, PLC
1650 Market Street, Suite 3550 2727 Buford Road, Suite D
Philadelphia, PA 19103 Richmond, VA 23235
Office: 267.385.3624 804.474.9879 Office
Fax: 866.767.8201 804.241.9999 Cell
Mobile: 856.905.0407 rick@chesslawfirm.com
E-mail: david.gorenberg@citi.com
www.1031exchange.citibank.com www.chesslawfirm.com
1031.exchange@citi.com
@
855.253.1031
Thank You!
24 ©2012 David Gorenberg & Rick Chess