The idea behind the 1031 tax exchange is that the equity in one investment property, when transferred to another investment property, is still the same equity and there is a continuation of the same investment cycle, only in a different asset.

Exchange of property held for productive use or investment Non-recognition of gain or loss from exchange solely in kind.

In general. No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind, which is to be held either for productive use in trade or business or for investment.

Only assets allowed to be exchanged are Section 1231 or Section 1221 assets. It is clear that any real property held by exchanger as Section 1231 or Section 1221 property may be exchanged for any real property that is to be held by the exchanger as Section 1231 or Section 1221 property. For example, this allows the exchange of multi-tenant retail center for a single user gig-box retail property; an office building for investment land; an apartment building for a retail center; or a multi-tenant office building for an office building that only will be occupied and used in the business of the exchanger. While the ability to exchange any Section 1231 or Section 1221 property for other like-kind Section 1231 or Section 1221 property exists, there are specific exceptions to the rule.

This subsection shall not apply to any exchange of:

- Stock in trade or other property held primarily for sale
- Stocks, bonds, or notes
- Other securities or evidences of indebtedness or interest
- Interests in a partnership
- Certificates of trust or beneficial interests
- Choses in action some of those exceptions are of special interest to real estate agents:

• Stock in trade or other property held primarily for sale. This exception specifically excludes the inventory property classification of assets. Developers may, of course, use exchanging as a disposition plan, but they will not qualify for the tax deferral treatment under Section 1031.
• Other securities or evidences of indebtedness or interest. This exception relates to the carry-back financing that sellers acquire in installment sale. While one trust deed may be traded for another trust deed, the transaction will not be treated as a tax deferred exchange.
• Interests in a partnership. This exception relates to partnerships that own real estate. The partnership may exchange the qualifying property it owns for other qualifying property and receive the tax deferral promised in Section 1031. The partners, however, cannot exchange their partnership interests on a tax deferred basis. The partnership interests owned by the investors are personal property. IRS Section 761 deals with the requirements which must be met to complete the exchange of partnership interests.
  
  

The 180-day time limit imposed is strictly for the purpose of making sure that taxpayers are able to file their tax returns in a timely manner. The 180-day period during which the taxpayer has to acquire a replacement property is further broken down into time segments. The first section tells us that the taxpayer has 45 days to identify the property he/she is going to acquire in the exchange. Multiple properties may be identified prior to the 45Th day, but on the 45Th day, the final identification must be made.

Identification Period and Exchange Period. The identification period begins on the date of taxpayer relinquished property and ends at midnight on the 45Th day thereafter. The exchange period begins on the date the taxpayer transfers the relinquished property and ends at midnight on the earlier of the 180Th day thereafter or the due date (including extensions) for the taxpayer's return of the tax imposed... for the taxable year in which the transfer of the relinquished property occurs. The above time limits cannot be extended. If the 180Th day falls on a weekend or holiday, the dates are not extended. The taxpayer must be certain to have the escrow closed on the acquired property within the timeframe.

The regulations issued by IRS place further restrictions on the identification process. The taxpayer has two choices. One choice is to identify three properties, regardless of their value in relation to the value of the property being relinquished.

Treatment of Deferred Exchanges. Alternative and Multiple Properties. The taxpayer may identify more than one replacement property. Regardless of the number of relinquished properties transferred by the taxpayer as part of the same deferred exchange, the maximum number of properties that the taxpayer may identify is Three properties without regard to the fair market values of the properties (the three-property rule), or...

The second choice the taxpayer has is to identify more than three properties, but the market value of the total properties identified must be less than 200% of the market value of the property being relinquished.

Any number of properties as long as their aggregated fair market value as of the end of the identification period does not exceed 200 percent of the aggregate fair market value of all relinquished properties as of the date the relinquished properties were transferred by the taxpayer (the 200-percent rule)...

Regulations have been issued that direct an investor on the proper method of identifying the property(ies) within 45-day period. The identification must be maid in writing and be delivered to the proper person.

Manner of Identifying Replacement Property. Replacement property is identified only if it is designated as replacement property in a written document signed by the taxpayer and hand delivered, mailed, telescoped, or otherwise sent before the end of the identification period to either the person obligated to transfer the replacement property to the taxpayer...

The property to be identified must be identified unambiguously through its legal description, address, or common name.

During the exchange the taxpayer cannot receive property that is considered not like kind. Receipt of non-like-kind property is considered cash and is not qualified for tax deferred exchange.

Safe harbors (1) in general... safe harbors, the use of which will result in determination that the taxpayer is not in actual or constructive receipt of money or other property for the purpose of Section 1031...

To qualify for the 1031 Deferred Tax Exchange investor may use services of Title Company to facilitate the exchange. It is essential for the taxpayer to create a paper trail establishing the intent to complete an exchange. Title Company will assist you in completing successful 1031 Tax exchange.

The following is a sample of language that could be found in an exchange document (contract):

"It is the intention of the seller to effect a tax-deferred exchange in conformance with Section 1031 of the Internal Revenue Code. Seller may assign his/her rights in this contract to Title Company for the purpose of effecting such exchange. Buyer agrees to cooperate and execute necessary documents to allow seller to effect such exchange. However, any warranties that may be expressed in this contract shall remain and be enforceable between the parties executing this document."