Page 13 - Old Republic Title Exchange

ANSWERS
TO YOUR QUESTIONS

Is there any way to get an extension on the 45-day or 180-day deadlines?*
No extensions are allowed on the 45-day deadline with respect to the
exchange period. However, if the 180-day exchange period is cut short by
the earlier occurrence of your tax filing date, you may file for an extension,
in order to get the full 180-day exchange period.
What is a boot? Broadly defined, boot is anything given or received by
the taxpayer that is not like-kind or does not qualify under section 1031.
Boot may be in the form of cash or a promissory note (i.e., cash boot), or it
may be in the form of debt (i.e., mortgage boot). Any boot received by the
taxpayer in connection with the disposition of the relinquished property
which is not offset by boot given on the acquisition of the replacement
property, is gain that must be recognized, i.e., taxed. Thus, it is important to
understand the boot-netting rules.
Boot-netting rules:
1. Cash paid on the acquisition of the replacement property offsets cash
received on the disposition of relinquished property;
2. Cash paid on the acquisition of replacement property offsets debt
relief on the disposition of relinquished property; and
3. Debt acquired/assumed on the replacement property offsets debt
relief on the disposition of relinquished property.
Caveat: Debt assumed on the acquisition of the replacement property will
NOT offset cash received on the disposition of the relinquished property.

If I own a property with another investor, can I exchange my interest if s/he doesn't want me to? Yes. You should clearly allocate each
investor's interest in the property before you sell. The investor who wishes to exchange may do so and the other investor may receive
cash (taxable). It is, however, very important that the investors be clear on their intentions before entering into an exchange agreement
with a QI.
What is a partial tax exchange? If the equity on your investment property is $150,000, and you want to use only $100,000 to purchase
your replacement property and take $50,000 out to buy a new car, you will have a partially tax-deferred exchange. The $50,000 cash
you took to purchase the car is considered taxable cash boot.
May I take out my basis and reinvest only the gain? No. Both basis and gain must be reinvested to defer taxes. The IRS does not allow
you to allocate a portion of the money as basis and a portion as gain. Any money received by the exchanger will be considered boot and
taxed at capital gain rate.

What is the exchange value of the property? Simply stated, the exchange value is your sales price, less your closing costs. The
exchanger is responsible for reinvesting the exchange value (i.e., the cash and loan amount) when they purchase the replacement
property. (See section on boot.)
How is a seller carry-back note handled in an exchange? The note and deed of trust must be drawn in the QI’s name. During the
exchange period, the note must be converted to cash, which is then added to the exchange proceeds to be applied to the purchase of
the replacement property in one of the following three ways:
1. Sell the note to a third party for cash that is then added to the exchange proceeds; or
2. Obtain the agreement of the replacement property seller to accept the note as part of the purchase price of the replacement
property; or
3. Accept only a short-term note that will be paid in full prior to the acquisition of the replacement property.
I own a piece of property that includes my primary residence and a rental unit. Would it still qualify for an exchange? Yes, as to the
rental portion of the property, so long as you remain consistent with your past tax returns. Consult with your tax advisor to determine
the percentage value of the property you have attributed to investment. You may exchange that portion of the value. See Revenue
Procedure 2005-14 for guidance.
*If the 45th or 180th day ends on a weekend or holiday, no extension of the time frame to the next business day is allowed under any circumstances

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