IRC 1031 Exchanges
IRC Tax Deferred 1031 Exchanges

The Tax Deferred Exchange: The deferred exchange, as defined in Section 1031 of the Internal Revenue Code
of 1986, as amended, offers real estate investors one of the last great investment opportunities to build wealth
and save taxes. By completing an exchange, the investor (Exchanger) can dispose of their investment property,
use all of the equity to acquire a replacement investment defer the capital gain tax that would ordinarily be paid,
and leverage all of their equity into the new property. Two requirements must be met to defer the capital gain tax:
(a.) the Exchanger must acquire “like kind” replacement property and (b.) the Exchanger cannot receive cash or
other benefits (unless the exchanger pays capital gains taxes on these monies).

In any exchange, the Exchanger must enter into the exchange transaction with a Qualified Intermediary (aka
Accommodator) prior to the close of the relinquished property. The Exchanger and the qualified intermediary
enter into an Exchange Agreement, which essentially requires that (a.) the Qualified Intermediary acquires the
relinquished property from the Exchanger and transfers it to the Buyer by a direct deed from the Exchanger and
(b.) the Qualified Intermediary acquires the replacement property from the Seller and transfers it to the Exchanger
by a direct deed from the Seller. The cash or other proceeds from the relinquished property are assigned to the
Qualified Intermediary and are held by the Qualified Incendiary in a separate, secure account. The Exchanger
funds are used by the Qualified Intermediary to purchase the replacement property for the Exchanger.

Important Considerations for Exchanging: Exchanges must be completed within strict time frames, absolutely no
extensions are allowed. The Exchanger has 45 days from the date the relinquished property closes escrow to
“identify” potential replacement properties. This involves a written notification to the Qualified Intermediary listing
the addresses or copies of legal descriptions of the potential replacement properties. The purchase of the
replacement property must be completed within 180 days after the close of the relinquished property. After 45
days has passed, the Exchanger may not change their Property Identification list and must purchase one of the
listed replacement properties or the exchange fails.

To avoid the payment of capital gain taxes the Exchanger should follow three general rules: (1.) purchase a
replacement property that is of the same or greater value to the relinquished property, (2) reinvest all of the
exchange equity into the replacement property and (3) obtain the same or greater debt on the replacement
property as on the relinquished property. The Exchanger can offset the amount of debt obtained on the
replacement property by putting the equivalent amount of additional cash into the Exchange.

This information is for general purposes only, consult a tax advisor for further details and questions.
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Prestige Properties & Finance, a Real Estate & Mortgage Broker
2658 Del Mar Heights Road, Suite 207, Del Mar, CA 92014
Ph. 858-484-3446 / 619-568-3800 / 760-690-4400 :: Fax 858-484-3577
Licensed by the California Dept. of Real Estate. License #01153458
An equal opportunity Real Estate & Finance Company. All information deemed reliable but not guaranteed.
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