Page 11 - Old Republic Title Exchange

100% Deferral

To fully defer state and federal capital gains taxes, the exchanger must reinvest all exchange proceeds and either acquire property
with equal or greater debt, or reinvest additional cash equal to the debt relief. The following worksheet is a useful tool for determining
the amount of cash and debt that should go into the replacement property.

Relinquished Property Example Replacement Property Example
Sale Price: $400,000 Purchase Price: $600,000
Minus Existing Loans: $150,000 Minus New Loans: $375,000
Minus Exchange Expenses: $25,000 Equals Minimum Down: $225,000
Equals Net Proceeds $225,000
Your minimum down payment for the replacement property should be equal to or greater than the net proceeds from the sale of your
relinquished property, otherwise, you may have boot in the form of cash.

Determining the Property Vesting Examples of scenarios which are allowed using different entities
The taxpayer who disposes of the relinquished property must be • Individual relinquishes and an LLC, which individual is sole
the same taxpayer who acquires title to the replacement property. member of, completes the acquisition.
Problems arise when title to the relinquished property is held differently
than title to the replacement property. For example, a husband and • Husband and wife are trustees of a revocable living trust, which
wife dispose of property and acquire new property to which only the is a true pass-through trust; relinquish, and husband and wife
husband is on the title. Or, partnership ABC disposes of property and acquire as individuals.
partner A individually acquires replacement property with the title in A’s • Single-member LLC relinquishes and sole member acquires as
individual name. Or, ABC Irrevocable Trust disposes of property and A an individual.
acquires the title to the replacement property individually. • Individual relinquishes and individual’s estate acquires due to the
The following scenarios are disallowed: death of the individual.
• Husband relinquishes, and husband and wife acquire property of The Exchange Contract Addenda
equal value. When exchanging, insert this language into your purchase and sale
• ABC Corporation relinquishes and XYZ Corporation acquires. contract or call Old Republic Exchange for a personalized exchange
• ABC Partnership relinquishes and partners acquire as individuals. contract addendum:
• ABC Partnership relinquishes and XYZ Partnership acquires. • Contract for the sale of Relinquished Property:
Buyer acknowledges that it is the intention of Seller to effect
• Multi-member LLC relinquishes and members acquire an IRC §1031 tax-deferred exchange, which will neither delay
as individuals. the closing, nor cause additional expense or liability to the

• ABC multi-member LLC relinquishes and XYZ multi-member Buyer. Buyer further acknowledges that Seller’s rights but not
LLC acquires. its obligations under this agreement may be assigned to Old
Republic Exchange, a QI, to facilitate the exchange. Buyer agrees
Exceptions to the "same vesting" rule: to cooperate with Seller and Old Republic Exchange to enable
The replacement property may be acquired by a “disregarded Seller to complete the exchange.
entity” that is wholly-owned by the taxpayer who disposed of the
relinquished property. This is because a disregarded entity is ignored • Contract for the acquisition of Replacement Property:
for federal tax purposes. Instead, the owner of the entity is deemed Seller acknowledges that it is the intention of Buyer to complete
the taxpayer for federal tax purposes. Examples of disregarded an IRC §1031 tax-deferred exchange, which will neither delay
entities include: the closing nor cause additional expense to Seller. Seller further
acknowledges that Buyer’s rights but not its obligations under
• A LLC with one owner that does not elect to be classified as a this agreement may be assigned to Old Republic Exchange, a
corporation;
QI, for the purpose of completing the exchange. Seller agrees to
• A revocable living trust; cooperate with Buyer and Old Republic Exchange in a manner
• An Illinois land trust; necessary to enable Buyer to complete this exchange.
• A Delaware Statutory Trusts (under certain circumstances - See
Rev. Ruling 2004-86)

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