I have just sold investment real estate for $400,000 and ADE is holding net proceeds of $200,000 which should cover the cost of my chosen replacement property. If I have reinvested all of my cash proceeds, will there still be any tax consequences?

Yes. Based on your description, there would be a tax consequence. In order to defer all taxes in an exchange, you must meet several requirements:

• All the proceeds from the relinquished property sale must be used in the replacement property acquisition; and

• Any new debt on the replacement property acquisition must equal or exceed the debt that was paid off or assumed on the relinquished sale.

An easier rule of thumb is the replacement property costs must equal or exceed the price of the relinquished property and you must use all of the proceeds to get total gain deferral. In this instance, it appears there must have been approximately $200,000 worth of mortgage that was paid off on the sale (sold for $400,000 but net proceeds of $200,000). Because you only acquired a $200,000 replacement property, you used all of your cash but you failed to replace the debt that was paid off. Because your new property cost $200,000 less than your old property, you have created what is referred to as “mortgage boot” which is taxable to the extent of the gain.

I am getting ready to begin my first exchange.  Are there any situations in which the exchange period can be something other than 180 days?

Although the vast majority of exchange periods are 180 days long (as per IRS guidelines), shorter variations can occur when the sale of your relinquished property occurs between October 15th and December 31st and also depending on when you file your tax return.  The IRS stipulates that the exchange period ends on the 180th day or the filing date of your tax reporting period—-whichever comes first.

How long must I own a property before it qualifies for a 1031 tax-deferred exchange?

There is no minimum time that a taxpayer must own a property in order to properly complete a 1031 exchange. Many tax professionals feel that if a relinquished property would qualify for long-term capital gains treatment (i.e. it has been owned for at least one year), an investor is safe in seeking 1031 exchange treatment. As background, the IRS has twice requested, in 1989 and again in 1997, that Congress implement a minimum one-year holding period for property to qualify for a 1031 exchange. Neither of these requests were approved by Congress, so there is no statutory minimum ownership period that applies.

Please be aware, however, that certain types of real estate do not qualify for 1031 exchanges. These include “flip property” which is property held primarily for sale or any property that would be considered “inventory”. How long a property is owned by a taxpayer is one just one of the factors that is analyzed when determining whether or not a property qualifies. Other criteria that come into play relate to the original intent of the taxpayer, actual marketing activities, and how the property is reported for federal income tax purposes. It is important that these additional elements be considered along with the length of time the property is held to determine the viability in executing of 1031 tax- deferred exchange.

I’ve heard tax deferred exchanges referred to as “like-kind” exchanges. I am selling a piece of undeveloped land and want to buy a small apartment building. Would these two properties be considered like-kind?

Yes. The “like-kind” definition for real estate is very broad. The IRS Code defines “like-kind” as any property “held … investment.” So by definition, any investment real estate falls under the definition of property held for investment. Because of this flexibility, a rental condo can be exchanged for an apartment building or a distribution warehouse can be exchanged for several tracts of undeveloped land. The type of investment real estate and even the number of properties sold or acquired need not be the same.

I am selling a triplex I primarily hold for investment, but I live in one of the three units. The contract price is $750,000. Am I eligible to do a 1031 exchange on this transaction?

Yes, you can. The unit that you are living in would be considered your primary residence. As long as you have owned and lived in the property for at least 2 of the past 5 years, you would be able to use the primary gain exemption on the sale of that portion of the triplex. (Under Section 121 of the IRC, the exemption is $250,000 if you are single and $500,000 if you are married). As the other two units are rental units, they would be treated as qualified property for a 1031 exchange.

Although I intend to use the majority of my exchange proceeds to acquire another investment property, I would like to keep some of the cash. Can I do this without invalidating my entire exchange?

Yes. If you would like to keep a portion of the proceeds, you can opt to complete a “partial” exchange. Tax would be due on the portion of cash that you keep. (For other items that can trigger a taxable consequence in an exchange, see a related question below.) In order to derive the maximum exchange benefits, however, you would need to reinvest 100% of the cash.