1031 Exchange
1031 Properties
Qualified Intermediary
NNN 1031 Properties
Boot

1031 Exchange: the disposition of property held for use in a productive trade or business or held for investment, and the acquisition of replacement 1031 properties, under Section of the Internal Revenue Code, which affords an exception to the rule requiring recognition of gain and the payment of income tax upon such disposition.

1031 Properties, Like Kind Properties, Replacement Properties: these are synonyms for property “like in kind” to property that has been held for use in a productive trade or business or held for investment before disposition.  The “like in kind” requirement does not mean that exactly the same type of property must be acquired, or even that the properties must be of a similar use.

Like-kind property is defined broadly. You may exchange any real property (as determined by state law) you have held for use in a productive trade or business or for investment for any real property (as determined by state law) that you will hold for use in a productive trade or business or for investment. This means you can exchange an office building for an apartment complex, or raw land for a strip mall, or farm land for an industrial building.

 To defer tax completely, you may not exchange real property held for use in a productive trade or business or for investment for tangible personalty (such as equipment) or intangible property (such as copyrights). And you may not exchange a primary residence or property held “primarily for resale” (also known as “dealer property.”

Boot: any property that is not like-kind is taxable in a 1031 exchange.

Cash: any funds actually or constructively received by the exchanger from the sale of the relinquished property and not spent will be taxed at the applicable rate.

Debt: any reduction in debt is treated the same as the receipt of cash and is taxable to the extent not offset by cash added to the transaction.

Personal property: you may take up to 15% of the value of replacement 1031 property in personal property (e.g., equipment) without identifying the personal property but the 15% is taxable as boot.

Paper: carrying back a note is treated the same as taking cash.

In sum, to defer all capital gains taxes, you must buy 1031 properties of equal or greater value (net of closing costs), reinvesting all net proceeds from the sale of the relinquished property in qualifying real property. Any net proceeds not so reinvested, or any reduction in debt not offset by the investment of additional cash, is taxable boot.

Exchange 1031 Properties: see 1031 exchange.

NNN 1031 Properties: 1031 properties requiring the tenant to pay all property expenses such as taxes, utilities, maintenance, repairs, insurance, and the like.

Qualified Intermediary: an entity that documents the exchange transaction and holds the funds in a trust account on the behalf of the client until the client has found one or more 1031 properties within the set time limits.