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Principals for Using Section 1031

In order for an investor/taxpayer to avoid immediate recognition of gain there are three primary principles which must be followed when doing an exchange. These are principles only. The rules are quite specific, and failure to use them correctly can end in tax disaster. Consult your tax professional regarding the actual mechanics of a successful exchange. A good place to begin is with a member of the National Council of Exchangors. The National Council of Exchangors website is: http://www.infoville.com/nce and their phone number is (800) 324-1031.

1. The investor must be exchanging into a property which has a price at least as high as the value of the property the investor is leaving behind. Such properties are known as "upleg properties".

2. The upleg property must have at least as much debt against it as the property the investor is leaving behind. In the event that the debt is lower on the upleg property there is taxable "mortgage or debt relief", even if no cash is received by the investor.

3. The investor cannot receive property that is not "like kind". Any cash, tangible or intangible personal property, personal residence or dealer inventory property is considered to be unlike kind under Section 1031 and is taxable. (personal residences are given separate treatment under Section 1034).

An important note on popular "delayed exchanges" utilizing "accommodators" or "qualified intermediaries":

Investor/taxpayers are actually exchanging a "deed for a deed" with the accommodator or intermediary. The taxpayer, technically, never has possession of any of the funds realized from the sale of the property they are leaving behind. They deed their "old" property to the accommodator, who then legally closes the sale with the buyer. The accommodator then holds the funds until they are later used by the accommodator to purchase the upleg or "new" property. After the accommodator closes on the new property, they then deed it to the taxpayer. The difference between delayed exchanges and simultaneous exchanges is that in a delayed exchange the taxpayer goes out of title to their old property at a different time than they go into title on the upleg property (up to 180 days difference). This is where the services of the accommodator are necessary. Where there is a true, simultaneous, "deed for deed" exchange, no accommodator is required.

Please note two VERY IMPORTANT points from the foregoing:

• IN ORDER FOR THE TAXPAYER/INVESTOR TO DEFER GAIN HE OR SHE MUST NOT RECEIVE ANY CASH OUT OF THE TRANSACTION.

• THE INVESTOR/TAXPAYER MUST CREATE A TRANSACTION WHEREIN AN EVEN LARGER POTENTIAL TAX EVENT IS CREATED FOR THE PARTY WHOSE PROPERTY THEY ARE ACQUIRING! (The new property must cost more and have a bigger mortgage then their previous property.)