Tax-Free Swaps is a book about section 1031 exchanges. It discusses the potential financial benefits of section 1031, describes the section 1031 requirements a property owner must satisfy to qualify for section 1031, identifies eligible exchange property that may qualify for a section 1031 exchange, presents the various exchange structures that property owners may draw upon to benefit from section 1031. This book is written for a broad audience . It will present a valuable overview of section 1031 for the novice and ideas for property owners looking for ways to preserve investment capital. Real estate professionals working with property owners, tax advisors, and other professionals who are in a position to assist property owners doing section 1031 exchanges also stand to benefit from the book.

Section 1031 Financial Benefits | top

Section 1031 allows a property owner to avoid taxable income on the disposition of eligible exchange property. A simple example demonstrates the potential financial benefits section 1031 provides. Edward owns Duplex, which he rents out. Edward has an adjusted tax basis in Duplex of $50,000. Brenda offers to purchase Duplex from Edward for $100,000. If Edward were to sell Duplex for cash, he would recognize $50,000 of gain, which would most likely be subject to tax. Assuming a 15% tax rate, Edward would owe $7,500 of tax on the transaction. If Edward were to use one of the exchange structures to do a valid section 1031 exchange, he could reinvest the entire $100,000 in like-kind property and avoid the $7,500 tax. He thus preserves his investment net worth by doing a section 1031 exchange. The book describes how to compute taxable income and determine the amount of taxes that section 1031 can save on an exchange.

Section 1031 Requirements | top

A transaction must satisfy three basic requirements to be a section 1031 exchange. First, the transaction must come within the section 1031 definition of exchange (the “exchange requirement”). Second, the person doing the exchange must hold the exchange properties for productive use in a trade or business or for investment (the “holding and use requirement”). Third, the exchange properties must be like kind (the “like-kind property requirement”). In addition to satisfying the three basic requirements, an exchange must involve qualified assets. Section 1031 does not apply to exchanges of assets such as inventory, corporate stock, and interests in partnerships. Each section requirement is extensive, receiving considerable attention in the book.

Exchange Property | top

A common misconception is that section 1031 only applies to real property. Although section 1031 is a major part of the real estate economy, it also applies to other types of property. The following is a short list of the types of property to which section 1031 applies.

• Real Property
• Leaseholds
• Tenancy-in-Common (TIC) Interests
• Equipment
• Machinery
• Aircraft
• Patents
• Copyrights
• Collectibles
• Livestock

The book describes the rules that apply to exchanges of different types of property.

Exchange Structures | top

Section 1031 applies to a variety of exchange structures. For example, it applies to the sale of a piece of property to one person followed by the acquisition of another piece of property from someone else. The several types of exchanges, including the following:

• Deferred Exchanges
• Multi-Party Exchanges
• Reverse Exchanges
• Improvements Exchanges
• Related Party Exchanges
• Exchanges of Mixed-Use Property
• Exchanges and proximate business restructurings

Some of these transactions can be complicated. Using examples, diagrams, and other illustrations, the book describes each structure and identifies when it might be available to a property owner. It also describes the role qualified intermediaries and exchange accommodation titleholders play in exchanges.

The book also discusses tenancy-in-common (TIC) interests and issues exchangers must consider when deciding whether to acquire a TIC interest as replacement property. Finally, the book discusses how to avoid dealer status and remain eligible for the section 1031 benefits.

Book’s Audience | top

The book will help many people. Some readers will appreciate the opportunity the book provides to learn about section 1031 and obtain an overall understanding of tax-free exchanges. Others readers will appreciate having the book available as a reference to become familiar with exchange structures when doing an exchange or when preparing to meet with a client to discuss exchange opportunities. Those who will benefit from the book include the following:

• Real Estate Agents and Brokers
• Attorneys
• CPAs
• Bankers
• Financial Planners
• Exchange Specialists
• Closing Agents
• Title Companies
• Law, accounting, and financial planning students

This is the first book of its kind to explain the complexity of section 1031 to non-experts. It is designed to make information about section 1031 accessible to a large audience and provide more people the opportunity to participate in section 1031 exchanges.