25 True/False Statements about a 1031 Tax Deferred Exchange:

1. To complete a successful tax-deferred exchange, only two parties are necessary; a buyer and a seller. False. Under the 1031 tax deferred exchange, more than two parties are allowed.
   
   
2. Any tax liability deferred from a taxpayer using a Section 1031 exchange will eventually be repaid by the taxpayer’s estate on his or her death. False. All taxes will be forgiven at this point; however the heirs will now own the property with what is called stepped-up basis.
   
   
3. Basis is the value or dollar amount of the property you own in the eyes of the IRS. True. If a party purchased a building for $200,000, and made no improvements to the property, then the basis would be $200,000. Using another scenario, if the sellers had made no improvements, and the house had a depreciated $10,000 over their ownership tenure, the basis would be $190,000.
   
   
4. There is no need to use an escrow or closing agent to complete a Section 1031 tax-deferred exchange. False. All tax-deferred exchanges require the services of an escrow agent. The sellers cannot touch any monies during the tax-deferred exchange.
   
   
5. The money or other type of property given to one of the parties in a transaction to make up the difference between the exchanged values is referred to as boot. True. This term is self-explanatory. Any difference between the exchanged properties is termed boot.
   
   
6. The amount received by a seller minus the adjusted basis in the property is called the gain. True. For example, Seller “A” buys a property for $500,000. It depreciates $50,000 over her ownership period. Her basis is $450,000 if she has made no other improvements. The seller sells the property for $600,000. Her gain is $150,000.
   
   
7. It is not uncommon for more than three parties to be involved in a tax deferred exchange. True. Examples of three parties in a transaction include a seller, buyer, and escrow agent.
   
   
8. Any heirs to a parcel of real estate would receive a stepped-up basis in the value of the property if the deceased person had utilized the tax-deferred exchange program. True. One advantage of a 1031 tax deferred exchange is that the tax or gain is ultimately forgiven upon the death of the owner. The heirs would then have the property appraised and their basis would be the value at the time of the original owner’s death.
   
   
9. One disadvantage to using the Section 1031 tax-deferred exchange program is that no cash can be received at the time of the closing on the first property sale. True. All cash must pass through an escrow agent and cannot be touched or received by the sellers.
   
   
10. The party who acquires a property and then resells that same property for a fee during a 1031 tax-free exchange is called an intermediary. True.
    
    
11. Stocks, bonds, notes, and certain other forms of personal property do not qualify for tax-deferred exchanges. True. Some personal property will qualify for a tax-deferred exchange, but for our basic understanding of exchanges only real property is considered.
    
    
12. For a tax-deferred exchange to be qualified, the properties exchanged must be what is deemed “like kind”. True. Like-kind means real property for real property, a farm could be exchanged for a multi-family dwelling or vice versa.
    
    
13. All real property is considered like kind. True. For example, vacant land can be exchanged for rental property.
    
    
14. Under the like-kind rule, a commercial store building could be exchanged for raw land. True.
    
    
15. Under the like-kind rule, an apartment building could be exchanged for personal property. False.
    
    
16. For a property to qualify for a Section 1031 exchange, the property must have been held for a productive use in the trade or the business of the taxpayer. True. Tax-deferred exchanges are not allowed on personal dwellings.
    
    
17. A property purchased, remodeled, and then sold the following month could qualify for a Section 1031 exchange as long as the exchange was for like-kind property. False. For a tax-deferred exchange to occur, the property must be kept for a specified length of time. Normally, the IRS considers 12 months or longer to be the rule of thumb.
    
    
18. When the taxpayer relinquishes his property, he has 45 days (from the closing date) to name the replacement property he intends to purchase. True. A taxpayer can name up to three different properties he wishes to purchase during the 45-day period.
    
    
19. The taxpayer must close on the replacement property within 180 days of the date he or she relinquished the property involved in the exchange. True. This is very important. If the closing does not take place within 180 days, the tax-payer will be subject to a penalty and interest along with taxes due from the original sale of their property.
    
    
20. A taxpayer may transfer one or more properties under the exchange rules. True.
    
    
21. Realized gain and recognized gain are the two types of gains viewed in the eyes of the IRS for Section 1031. True. Realized gain is the difference between the cash you receive (or other value) and the adjusted basis.
    
    
22. Realized gain is the difference between the cash received (or other value) and the adjusted basis. True.
    
    
23. Recognized gain is the amount of the realized gain that the IRS would deem taxable. True.
    
    
24. Boot is the difference between the exchanged values given in cash or other property to one of the parties for his or her property. True.
    
    
25. If a mortgage or note is used for the difference between the exchanged properties, the terminology used to describe this scenario is called mortgage boot. True.