Section 1031 of the Internal Revenue Code (IRC) requires the knowledge of many 1031 exchange tax rules. Violation of just one can jeopardize the tax deferral. In addition to the federal requirements, each state can legislate their own requirements as have Washington, Oregon, California, Idaho, Nevada, Colorado, Virginia and Maine. The state provisions focus on the protection of their constituents and how to best filter the 1031 exchange accommodator, or qualified intermediary, by defining minimum insurance requirements and how exchange funds are protected.

Intent and Facts

1031 exchange tax rules start with intent at the time the exchange is initiated, and the facts that support the intent and exchange. The proper 1031 intent as defined by the IRC as “property held in a trade, business or investment”. Property held primarily for personal use is not eligible for 1031 consideration. In addition, the following are not eligible for 1031 consideration.

• Primary residence
• Indebtedness
• Stocks, securities and bonds
• Partnership interest
• Inventory

However, the use of a primary residence can be converted and held as a rental, making the property eligible for a 1031 exchange.

Good facts supporting proper 1031 intent include:

• Property is rented a minimum of 14 overnights per year at fair market rate
• Property is held for two years, though a minimum of one year is highly suggested
• Property is held for rental
• Property is depreciated and reflected on the appropriate federal tax form.

Like-Kind Property

The 1031 exchange tax rules for property reflect the requirement that the property must be exchanged for “like-kind” property. Real and personal tangible and intangible property are eligible for 1031 consideration. Real property can be exchanged for any real property given the duration of interests is perpetual and both the old and new properties are located in the United States. Real property located overseas is exchangeable for any real property located internationally.

The exchange of personal property requires the property to be in the same class of asset. Thirteen general asset classes and the North American Standard Industry Classification Code classify the asset’s class. The exquisite violin owned and used by a chamber musician in their trade cannot be exchanged for an oil painting or vintage motor car. Each must be exchanged for “like-kind” property within the same class.

The kids have grown, the company no longer uses the property as a retreat, the taxpayers want to downsize or the price offered represent a number of reasons why taxpayers decide to sell their ranch. When selling, taxpayers want to know what the tax implications are, if the capital gains taxes can be deferred, and what planning steps are required.

Two Tax Deferral Strategies

The tax implications of selling a ranch can represent upwards of 40 percent of the sales price. The state capital gains rate varies by state – the California state capital gains rate is 9.55 percent, while in Montana, it is 6.9 percent. Federal long term capital gains is 15 percent, scheduled to sunset to 20 percent on January 1, 2013 in addition to a 3.8 percent health care tax on individuals whose income is greater than $250,000 per year. Add a 25 percent recaptured depreciation on real property improvements regardless of bonus depreciation and the taxes add up, making a tax deferral strategy a “must have.”

1031 Exchange

If the taxpayer’s intent is to replace the real property, then a 1031 tax deferred exchange may be the best tax deferral strategy. In a 1031 exchange, real property can be exchanged for any real property as long as both old and new are located in the United States. The debt and equity in the old or relinquished property must be equal to or greater in the replacement property. Personal property must be exchanged for “like-kind” or “like class” personal property, or in other words a tractor for tractor, stallion for stallion, or bull for bull.

A 1031 exchange indefinitely defers the federal, state capital gains and recaptured depreciation taxes until the replacement property is sold. 1031 exchanges can then be initiated as often as needed. Real property can be exchanged separately from personal property. To learn more about agricultural 1031 exchanges, download a complimentary whitepaper on 1031 Benefits for Farmers and Ranchers.

Deferred Sales Trust

If the taxpayer’s intent is not to replace those eligible 1031 exchange properties, a Deferred Sales Trust (DST) allows the capital gain and non accelerated depreciation recapture to be deferred. The DST invests the net proceeds of the sale into marketable securities and annuities whose income is paid out per a schedule determined by the taxpayer. The capital gains can be paid as a balloon payment or incrementally over the year consequently triggering capital gains tax on the portion received. The trustee is usually Hocking, Denton and Palmquist, a well established CPA firm in California experienced with administering this type of trust. For a complimentary illustration, complete the questions to right found on the DST page.

Eligible Real and Personal Property

The ranch is made up of real and personal property. The real property is the land, buildings, grazing rights, fixed irrigation headers and water and mineral rights, assuming the state recognizes water and mineral rights as real property. Personal property is the agricultural equipment and livestock.

• Is the ranch house considered a second home, primary residence or an investment property held for the production of income in a trade or business?
• Is the taxpayer’s intent to acquire replacement property?

Ranch House

If the ranch house is not the primary residence and personal use is limited to no more than fourteen overnights per year, the home is 1031 eligible. If the ranch house is considered and treated as a second home for federal tax purposes, the capital gains taxes can be deferred in a Deferred Sales Trust.

If the ranch house is the primary residence, then Section 121 of the Internal Revenue Code provides a $250,000 and $500,000 capital gain exclusion. If the capital gain exceeds the exclusion, the Deferred Sales Trust can defer the excess.

Planning

Investigating and understanding tax deferral options is the first step. It may make sense to sell the current primary residence and convert the character of the ranch house to your primary residence to make use of the Section 121 capital gain exclusion again after meeting the IRS requirements.

With the recent increases in farmland values and drop in real estate prices, some smart landowners might consider selling their farm and purchasing a new home. What are the tax implications of these transactions? The answer depends upon such factors as whether the farm has been the taxpayer’s primary residence or not; and whether the taxpayer has intent to purchase new property of equal or greater value. The Internal Revenue Code provides multiple opportunities for taxpayers to maximize their benefits when selling their property including tax deductions on the sale of the primary residence and 1031 tax deferred exchanges.

Primary Residence

Internal Revenue Code Section 121 allows a taxpayer to exclude up to $250,000 ($500,000 for married persons filing jointly) of the gain on the sale of their principal residence given during the five-year period from the sale date, the home has been owned and used by the taxpayer as their primary residence for periods of two years or more. This exclusion is available no more than once every two years. Those taxpayers who don’t satisfy the two-year ownership and use requirements can exclude a prorated fraction of the $250,000/$500,000 deduction given the taxpayer has a change in health or place of employment. Realized gain is determined by the following two steps:

Step 1:  Original Purchase Price + Improvements = Adjusted Basis

Step 2:  Sales Price – Adjusted Basis – Selling Expenses = Realized Gain

If the realized gain is less than $250,000 (when filing individual federal return) or $500,000 (when filing a joint federal return) there is no tax. If the gain is higher and the taxpayer is in the 25, 28, 33 or 35 percent income bracket, the tax is 15 percent. If the taxpayer is in the 10 or 15 percent income bracket, the capital gain tax may be 5 percent. As always, check with your accountant to confirm the tax consequences.

A principal residence located on the farm can be sold and replaced with a primary residence. Seek guidance from a farm realtor to establish comparable selling prices for the home and farmland.

Tax Impact of Selling the Farm

When selling the farm, there are two types of properties being sold, the land and affixed buildings –real property and equipment or livestock– personal property. Internal Revenue Code Section 1031 allows the taxpayer to defer the capital gains and recaptured depreciation taxes when equal or greater, like-kind real and personal property are replaced within 180 calendar days of the sale.

1031 Exchange

If the intent is replace the real and personal property, replacement property is acquired of equal or greater value. The farmland being sold can be exchanged for any real property in the United States including rental properties, parking lots, oil and gas royalty interests and single tenant, triple net leases such as a CVS Pharmacy or similar tenant. To defer the tax on the personal property, like-kind or like-class personal property would need to be acquired. Each type of personal property falls into one of thirteen general asset classes or six digit North American Industry Classification Code.

1031 Alternative: Deferred Sales Trust

If only the home is to be replaced then the options are to pay the tax on the real (farmland and buildings) and personal property (equipment and livestock) or consider another tax deferral strategy that does not require the purchase of replacement property. A Deferred Sales Trust, similar to a Section 453 installment loan, allows the proceeds of the sale to be invested by the trust in marketable securities and annuities. Investments are determined by the taxpayer and executed by the trust.  Income from the investments is repatriated to the taxpayer on a schedule determined by the taxpayer. If the taxpayer wants a blend of income and gain from the sale, that can be scheduled. Taxes are paid on the income and capital gains received. Taxes on the capital gain are paid over whatever period of time determined by the taxpayer.

1031 exchange rules have been refined since being created by the Department of Treasury ninety years ago. The Internal Revenue Service (IRS) enforces a Treasury Regulation known as Section 1031 that provides all taxpayers with the ability to defer federal and state capital gain and recaptured depreciation taxes when property held for productive use in a business or investment is exchanged for like-kind property held for productive use in a business or investment. Supporting the 1031 code are 1031 exchange rules based on case law, regulations, revenue procedures, revenue rulings, private letter rulings, technical advice memorandum and other guidance from the IRS.

1031 Exchange Activity

The Joint Committee on Taxation estimates that in Tax Year 2004, the total dollar amounts deferred were $73.6 billion. In Tax Year 2011, the estimated total tax dollar deferral is $2.5 billion, with $.800 billion from individuals and $1.7 billion from corporations. In Tax Year 2012, the estimated tax deferral is projected to increase to $3.2 billion.

1031 Exchange Rules

The basic five 1031 exchange rules include:

1. The federal and state capital gains taxes are deferred if the replacement property is equal to or greater than the property sold.The common misconception is that only the realized gain needs to be reinvested. Both the net equity and debt retired – if any – from the sale must be reinvested to defer 100 percent of the gain.
2. A Qualified Intermediary (QI) must be engaged to accommodate the exchange. This cannot be your CPA , attorney, realtor or financial advisor or a related party such as your employee or lineal blood relative.One exception is in a pure exchange where the Taxpayer and Buyer want each other’s property. For the nominal QI fee, it still makes sense to engage a QI to make sure the 1031 exchange rules are followed.A second exception is if the attorney has provided services related to title closing, they can also accommodate the 1031 exchange.
3. The taxpayer cannot touch or have access to the exchange proceeds or those funds are subject to taxation. Once the exchange proceeds are touched, the exchange is over.
4. The taxpayer who sells is the taxpayer who buys. If the wife owns an investment property, then the wife is the titleholder to the replacement property. The husband can be quit claimed or added to the replacement property title after the closing.
5. Following the first leg closing, the forty-five calendar day identification period begins, followed by an additional 135 calendar days to acquire the replacement property, for a total of 180 calendar days.

A 30 year or more leasehold of land is considered like-kind to a fee interest in land. Providing that the taxpayer has the right to extend the lease, the thirty year leasehold interest is eligible for Internal Revenue Code Section 1031 exchanges, allowing the taxpayer to defer federal and state capital gains while replacing with any type of real property.

Leasehold Interests

Wind energy projects are plentiful in north western Indiana, where it doesn’t take long driving county roads to see the ever present three whirling blades of megawatt turbines, producing electricity and revenue for the land owner. Purdue University, located in western Tippecanoe County, Indiana, is working towards a 100-megawatt turbine park that includes 50 two-megawatt turbines on 1,600 acres. Annual leases are projected to generate $10,000 per turbine. Many Indiana farmers have opted for similar thirty year leases with developers who combine engineering and construction services with power purchase agreements from utilities.

The right to use someone else’s property is a leasehold interest. Improvements made to land leased for thirty or more years are considered real estate. In the example of the wind turbines, the taxpayer who owns the wind turbines, along with the leasehold, can sell the lease. As long as the remaining term of the lease is 30 years or more including extensions, the taxpayer can defer the capital gain taxes when replacing with another thirty plus year lease or other real estate.

Examples of Leasehold Interests

In addition to wind turbines, other common construction projects on leasehold land include cell phone towers, billboards and outdoor advertising. Given the leasehold interest of thirty or more years, billboards and cell towers are improvements to the land and considered  like-kind to a fee interest in other real property.

Leasehold Gray Area

As a general rule, leaseholds with a term of less than thirty years are not considered like-kind to real property. In private letter ruling 200842019, the Internal Revenue Service (IRS) stated in an exchange of leaseholds:

“ if the two leased locations vary in value or desirability or in lease terms, these are factors that relate only to the grade or quality of the properties exchanged and not to their kind or class.”

The IRS may be saying that a lease for less than 30 years may be like-kind to a lease of more than 30 years. In Everett v. Commissioner Internal Revenue, a timber lease for three and six years for rights to remove timber on 5,000 acres was exchanged for a ten year timber lease on 24,000 acres.

After reading Jeanne Marie Laskas great article “Breeding the Perfect Bull” published in the Smithsonian Magazine, I wondered whether a 1031 tax deferred exchange would make sense when selling prize Red and Black Angus, Simmental, Charolais, Hereford, and Senegus bulls. The article is about “Donnell Brown and his fellow cowboys combining modern science with their decades of experience with cattle ranching to create the perfect specimen named Revelation.” Why would a rancher sell a top breeding bull like Revelation? Some of the reasons include genetics, age, injury and the price offered. Ranchers can take advantage of 1031 tax deferred exchanges when selling their animals and purchasing cattle of equal or greater value.

The R.A. Brown Ranch: Creating Top Breeding Bulls

The R.A. Brown Ranch located near the small town of Throckmorton, in East Texas is not your average cattle ranch. Like 97 percent of U.S. cattle ranches, it is also family-owned and operated, passed down to a fifth-generation rancher in a $76 billion beef production industry comprised of about 750,000 independent “cow-calf operations” with fewer than 50 heads. The Brown Ranch operates a 2,000 head farm specializing in breeding. Such ranches are known as “seed-stock providers” representing the beginning of the beef production cycle where genetics determine the qualities of filet mignon, sirloin and steak burgers.

Selling Top Breeding Bulls: Tax Implications

A top breeding bull can sell for $100,000 once their offspring are proven to be prime calves.

What would be the tax implications of the sale? It depends upon the purchase price, the sales price, the depreciation taken and the state capital gains rate. For example, a bull calf purchased for $10,000 and held for five years, depreciation taken for each of the five years resulting in a net adjusted basis of 0. A sales price ranging from $25,000 to $100,000 and selling expenses of $3,000, the estimated tax due is:

Alaska, Florida, Nevada, South Dakota, Washington and Wyoming do not impose a state capital gains tax.

Livestock: 1031 Exchange Benefits and Requirements

If there is intent to replace the bull with like-kind personal property, another bull or multiple bulls, then the taxes due can be deferred in an Internal Revenue Code Section 1031 tax deferred exchange. The IRS like-kind exchange rules require livestock to be:

• Same sex
• Mixed cattle for steer calves
• Cows for mixed yearlings
• Half-blood heifers for three-quarter-blood heifers.

Steps to 1031 Exchange

Before selling or buying in a reverse exchange, talk with your accountant to confirm the estimated capital gains tax. Once you decide to move forward in an exchange, contact a Qualified Intermediary (QI) to ask questions about the exchange and its mechanics. It is important to discuss where the exchange proceeds will be held, if interest will be earned on the account, and what security measures will be in place such as the use of a qualified escrow account and personal identification number to protect the account.

Once the QI is engaged, let them know the contact information of the sale or purchase, perhaps the auctioneer. The QI will prepare exchange documents for the first leg. Exchange funds will be wired to the escrow account under the taxpayer’s tax identification number.

By the 45^th calendar day, the replacement property will need to be identified by providing information on the bull(s). The value of the replacement property must be equal to or greater than the net sales price; otherwise a tax is triggered on the difference.

Contact the QI to let them know the details of when you are closing on the replacement bulls. The QI will prepare exchange documents for the second leg wiring the exchange proceeds to the closing.

Farms and ranches are made up of real and personal property. Depending upon the intent of the owner, land can be sold in a 1031 exchange replacing with a variety of real property choices including real estate and possibly an asset that provides cash flow such as a triple net lease property with a tenant like CVS Pharmacy. In recent years, given the historically low capital gains rate of 15%, paying the tax was and is an option.

If the owner wants to continuing their farming operations, the option starts with their accountant understanding the tax consequences of the sale. What is the value of the real estate, equipment and livestock? Are there water rights, mineral interests, gas and oil rights or easements that can be sold and gain deferred? If gain exists, the gain can be deferred by replacing with real estate and like kind personal property.

The primary residence stands on its own complying with Section 121 and the two year holding requirement to exclude either $250,000 if filing single or $500,000 if a joint return. A rule of thumb used to determine the amount of surrounding land that can be included with the residence is the area of grass typically cut around the home.

The personal property includes livestock and farming equipment. Does the owner want to replace or simply sell and pay the tax on the gain if one exists? The owner may have losses that can offset some of the gain.

A variety of decisions are required when selling farms and ranches and whether a 1031 exchange makes sense. Always seek the input of your accountant when selling real or personal property.

When selling property, there are 4 ways to receive the proceeds. The 4 ways include cashing out, a 1031 exchange, owner financing and an installment sale. All 4 come with potential concerns. For example, when cashing out, taxes must be paid immediately on the proceeds. The client may desire a 1031 exchange but as we know, sometimes exchanges fail and become a taxable event. Owner financing provides an income stream to the seller but the buyer may decide to pay off early and that creates a taxable event the seller may have hoped to avoid. An installment sale also provides pitfalls because the new owner may have a change in circumstances during the installment time period and may decide/be forced to give back the property. Then the seller has to start over and resell the property.

However there is a 5^th option that brokers need to be aware of. That 5^th option is a Deferred Sales Trust. The DST is a great opportunity that can enhance all of the options a seller has to receive proceeds. The DST is a trust that allows the seller to defer capital gains and other taxation on the sale of highly appreciated real estate for as long as the seller would like. Real estate properties can include land, ranches, farms, investment properties, commercial properties, a primary residence or a vacation home. Crops, livestock, timber or an agbusiness can also be sold in the trust.

Here is how the DST can enhance the other 4 options when the seller receives sales proceeds. First instead of cashing out and paying 15%-30% immediately in taxes, defer those taxes by using the DST. The proceeds can still be invested within the trust in the same manner that the seller would have invested outside the trust. However because the taxes are deferred, the seller is able to leverage the entire amount of proceeds to provide a larger cash flow from the trust. For example, $1,000,000 of proceeds in the trust invested @6% generates a $60k a year in income. After tax proceeds of $800,000 invested outside of the trust invested@ 6% generates $48k a year in income. Why wouldn’t someone want to invest in the trust?

The next option is a 1031 and as we are all painfully aware, not all exchanges are completed and that causes an immediate taxable event. A top notch qualified intermediary like Andy Gustafson at Atlas1031 can provide the proper wording to the client that will allow Atlas1031 to send proceeds to the DST should for whatever reason, the exchange cannot be completed. Thus, the DST acts as Plan B and since the seller does not have constructive receipt of the proceeds, the proceeds are not immediately taxable. But it gets better. The seller still has an opportunity to buy more real estate. Because there is no longer an exchange, the seller no longer has to jump through the IRS 1031 regulations and can now buy whatever property he would like whenever he likes. But it could get even better. When looking for financing, the proceeds in the trust might be used as collateral rather than the new property which might encourage the lender to give your client a better interest rate. So, let’s assume that the trust generates a 6% return and the interest rate on the loan is 4%. The income from the trust should be more than enough to service the debt service AND the trust owner still receives 2% from the trust. Everyone wins.

As far as owner financing and an installment sale is concerned, the DST solves the concerns associated with both and is probably a better alternative in almost every case. The only time that a DST probably would not work with an installment sale or owner financing is if the buyer doesn’t have the ability to buy the property outright.

There are numerous marketing opportunities utilizing the DST. For example, how often have you met elderly clients that would like to sell their property and move several hundred miles closer to their grandkids. An exchange doesn’t work and if they sell, there will be several hundred thousand dollars in taxes that they don’t want to pay. The DST may solve those problems and help you make a sale where there may not have been one otherwise.

If a potential client is concerned about finding a replacement property in an exchange, you can offer the DST as Plan B and there’s a real good chance that you will be the one that the potential client chooses to work with if there are several brokers involved in getting the listing.. Another opportunity involves a property with a lot of debt and little basis. If the property is sold, paying off the debt and taxes will leave nothing for your client and he may actually have to write you a check for your commissions. Why would he let you sell his property? If you introduce the DST, there is a way that not only can he sell the property but do so in a way that will still leave him with the proceeds in the trust which can defer his taxes but also provide an income stream to pay off his debt. He is in a much stronger financial position and you not only make a sale but you also get PAID when there would not have been a sale to begin with.

Now, consider the following. You are talking to a potential client that is interested in buying farmland or a timber property for income. Now, I will admit that I don’t know all of the intricacies of taxation in some of those instances but let’s assume that capital gains taxes are involved. The prospect is trying to decide which broker to use. You show him how the DST can help him defer taxation on the income from the timber or crops and guess who gets the business. You do.

Consider this one final example. A client tells you that he is going to be giving some property to a charity whose mission he feels strongly in through his will when he passes on. That’s great but there is no selling opportunity. Wrong. Consider telling him this. Mike, if I can show you how both you and your charity will be better off by letting me sell the property for you now rather than waiting until you die and giving it in your will, would you be interested in discussing that idea. The idea involves the DST and don’t hesitate to get your listing agreement ready because he will love your idea.

A famous Hollywood actor once said, “I’m proud to be paying taxes in the United States. The only thing is-I could be just as proud for half the money.” All he had to do was call you.

When selling a capital asset, it is critical to include the tax consequences of the transaction in the decision making process. Three taxes are typically triggered when a capital asset is sold including federal and state capital gain and recaptured depreciation. These taxes can represent upwards of 40% of the sales price and more if the asset is held less than one year. Such states as Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming do not have a state capital gains tax but federal capital gain and recaptured depreciation taxes will still apply to the sale. A 1031 exchange allows deferring the above-mentioned taxes until the sale of the replacement property.

Benefits and Risks

1031 exchanges can be initiated over and over, effectively deferring to your beneficiaries at death. Given our country’s debt issue, raising taxes will most likely be a part of the long term solution. The risk is whether the property acquired will appreciate and generate adequate income to exceed a higher capital gains rate.

Currently, the federal long-term capital gain tax rate on real property for taxpayers in the 25, 28, 33 and 35 percent brackets is 15%. Long-term capital gains is the federal income tax on assets held for one year and a day while short-term capital gains tax rate is the taxpayer’s ordinary income tax rate. Taxpayers in the 10 and 15 percent brackets pay 5% on long-term capital gains.

Effective January 1, 2013, the federal capital gains rate is scheduled to increase to 20%. An additional 3.8 percent Medicare tax will apply to those with an adjusted gross income exceeding $200,000 for single and $250,000 for married filing jointly taxpayers.

Example: When Benefits Outweigh Potential Risks

A married couple filing a joint return, has an adjusted gross income above $69,000 (in a 25-percent income bracket):

• They sell a rental property purchased for $200,000 for a sales price of $400,000. This triggers a realized gain of $180,000 and capital gains and depreciation tax of $35,120 in 2012.
• In a 1031 exchange, the gain of $180,000 is deferred by acquiring a property of equal or greater value. The new property is purchased for $400,000 and later sold for $500,000 after a year or more.
• The property’s basis is reduced by the $180,000 realized gain of the first property and the replacement property sale results in a realized gain of $278,000 or capital gains and depreciation tax of $65,552.

The 1031 exchange represents an interest free loan of $35,120, with the return on the investment appreciating at 3.0 percent or $1,053 per year. The return is woefully smaller than the $13,400 tax resulting from the higher capital gains tax. However, if the taxpayer wants to acquire a replacement property to continue deferring the gain, the exchange will be beneficial, given the longer the property is held, the more likely it is to justify deferring the higher capital gains tax with another 1031 exchange. If the taxpayer does not want to acquire another property, then it may make sense to pay the historically low federal capital gains tax of 15% along with the recaptured depreciation tax.

Deferred Sales Trust

Another option is a Deferred Sales Trust to defer the capital gain and depreciation taxes. Deferred Sales Trusts can defer the gain on primary residences above the Section 121 $250,000 and $500,000 exclusion and on highly appreciated second homes.

Landowners hold land for a variety of reasons including conservation, investment, cash flow and personal enjoyment. When intrinsic values change, it may be time to consider selling. If the intent is to replace current holdings with another type of real property, landowners can save money by using a tax deferment tool, also known as a 1031 exchange. Within the scope of eligibility for tax deferment, landowners have multiple replacement options such as building on land already owned, buying land and constructing improvements, replacing with single tenant, triple net leases such as CVS Pharmacy, Walgreens and a sale leaseback.

What Section 1031 Says

According to the Internal Revenue Code Section 1031, “no gain will be recognized on property held for productive use in business or investment when exchanged for like kind property held for productive use in business or investment.” Property denotes real and personal property. Real property is any type of real estate that is considered real property by the state. Examples of like kind real property exchanges include:

• Some states recognize perpetual water rights as like kind to a fee interest in real property
• Farmland is exchangeable for a tenants in common interest in commercial buildings
• 30 year leasehold interest or more is considered real property.

Tangible and intangible personal property held for the proper intent is also eligible but must be exchanged for like kind or like class personal property. Examples are:

• Unallocated gold bullion for Canadian maple leaf gold coins
• Furniture for furniture
• Half-blood heifers for three-quarter heifers
• FCC television licenses for FCC radio licenses.

Each of the replacement options share a likeness of physical properties, character of title conveyed, rights of the parties and period or duration of interests.

Replacement Property Options

Landowners can consider the following replacement options when selling real property:

Build on Property Already Owned
An Exchangor can acquire constructed improvements given the property is purchased from a third party as in a leasehold improvement exchange. The Exchangor cannot acquire property from himself in a 1031 exchange. The IRS does not recognize labor and materials as like kind to real property. Adequate planning is required at least six months prior to initiating this type of exchange unless the land is owned by a related party.

Improvement or Build to Suit Exchange
Property with improvements constructed to the design specifications of the Exchangor satisfies Section 1031 requirements given the property is transferred in exchange for other real property of equal or greater dollar value. A tax is triggered on the difference should the new property be of less value to the old property.

Single Tenant Triple Net Lease
The replacement property is either a new or existing commercial building with a tenant such as a CVS Pharmacy or like tenant who leases the property and is responsible for insurance, utilities and taxes.

Sales Leaseback
A sale of the Exchangor’s property is followed by a 30-year leaseback of the same property and subsequent purchase of a replacement property. This allows the Exchangor to sell his real property, retain use, and reinvest sales proceeds in a replacement property while deferring the capital gain and or recaptured depreciation taxes.

Exchangors are advised to seek the counsel of their legal, tax and real estate professionals prior to engaging in options described to understand the tax consequences and state statutes.