BASIC TERMINOLOGY OF 1031 EXCHANGES

In order for an investor to defer all capital gains taxes, there are four general guidelines that must be followed:

1. The Replacement Property must be equal to or greater in value
2. The debt on the Replacement Property must be equal to or greater in value
3. The equity in the Replacement Property must be equal to or greater in value
4. All net proceeds must be used to acquire Replacement Property

To the extent that the value, debt, or equity on the Replacement Property is less than the value, debt, or equity on the Relinquished Property, the Exchanger may have a taxable boot.

An Exchanger must identify the Replacement Property within 45 days after the sale of the Relinquished Property and close on the Replacement Property within 180 days after the close of the Relinquished Property.

This is known as "reverse exchange." In September of the year 2000, the IRS issued Revenue Procedure 2000-37, which is a "safe harbor" for completing 1031 reverse exchanges. Although somewhat more complicated, with careful structuring and planning, reverse exchanges (and construction and improvement exchanges) can be a viable option.

Some transactional costs paid by the Exchangers reduce realized and recognized gain and increase the tax basis of the Replacement Property. For instance, if the Exchanger receives $15,000 cashback in the exchange but has $10,000 in other exchange expenses, the Exchanger will recognize only $5,000 taxable income, and $10,000 will be added to the tax basis of the Replacement Property. Practitioners suggest that other transactional costs may also be deducted if paid in connection with the exchange. These costs typically include commissions, transfer taxes, finder's fees, title insurance premiums, legal fees, intermediary fees, and recording fees.

The sale proceeds are held in a federally insured account with local banks and are held in the name of GREATER BOSTON EXCHANGE COMPANY, LLC.

The Exchanger must file Form 8824 for each tax year the property was transferred to another party in exchange. In addition, Form 4797 must be filed for depreciable property and Schedule D for non-depreciable property in the year the Relinquished Property is sold.