1.   Section 1031, which allows tax deferral of capital gains taxes on investment property or property used in a trade or business has been available to taxpayers since:                                     
    a) 1986
    b) 1991
    c) 1945
    d) 1921

ANSWER:  d)  In 1918, income taxes were imposed on the gain or loss of all dispositions of property.  But in 1921, the non-recognition of gain or loss on an exchange was added to the Internal Revenue Code.

2.  The following properties DO NOT qualify for a Section 1031 tax deferred exchange:

    a)  stock in trade or property held primarily for sale
    b)  stocks, bonds, or notes
    c)   interests in a partnership
    d)   personal property

ANSWER: a, b, and c do not qualify for a Section 1031 exchange.  Personal property is allowed to be exchanged for “like kind” personal property used in a trade or business under section 1031 (a)(1), but the definition of “like kind” is much more restrictive than for real property exchanges.

3.  Examples of a “like kind” real property section 1031 exchange are:
    a) An apartment building for a piece of raw acreage
    b) An apartment building for another apartment building
    c) An apartment building for a condominium
    d) An apartment building for the ownership of a 30 year lease
    e) All of the above

ANSWER: The correct answer is (e) All of the above.  All real estate is defined as like kind with all other forms of real estate; so, yes, an apartment building is “like kind” under Section 1031 with raw acreage, another apartment building, a condominium and even a 30 year lease which in every state has been defined as real estate.

4. In order for there to be a valid Section 1031 Tax Deferred Exchange, the following must occur:
    a) Both the Seller and Buyer must want each other’s property
    b) Both of the taxpayers must exchange on their respective properties simultaneously.
    c) Both the Seller and Buyer must be related to each other
    d) The taxpayer that is exchanging must exchange for “like kind” property

ANSWER:  d)  The beauty of Section 1031 is that the taxpayer does not have to purchase the replacement property immediately. In fact, the taxpayer has up to 180 days to close on the replacement property from the date of his sale and does not have to purchase that property from his Buyer or a relative.  But the taxpayer must purchase property that is “like kind” to the property he relinquished.

5.  Which of the following will qualify for “like kind” status under Section 1031?
    a)  a piece of raw acreage exchanged for a motel
    b)  a farm for a tractor and trailer
    c)  a bus for a SUV
    d)  a typewriter for a computer

ANSWER:  a and d are like kind.  Any type of real estate for any type of real estate has been determined as “like kind” under Section 1031.  A typewriter, which was the precursor to the computer, has been classified as “like kind” to the computer, but a bus is not classified as like kind with a SUV.  Remember, personal property exchanges, are very restrictive.

I get asked this question all the time.  I have had clients want to use the proceeds for everything from paying off charge card bills, going on vacations, to buying themselves a Porsche automobile.   

The answer to this question was delineated in one of the four rules of  what we in the Qualified Intermediary industry call the "Napkin Rule".  The part of the rule discussing use of proceeds says:  "Thou shalt use all of the proceeds from the sale of the relinquished property towards the purchase of the replacement property."  OK--so what if you don't use all of the proceeds towards the purchase of the replacement property--will that invalidate your entire Section 1031 Tax Deferred Exchange?  The Answer is NO it won't--but you will be taxed on the portion of the proceeds that you kept and did not use towards the purchase of the replacement property--the rest of the proceeds that were used towards the purchase of the replacement property would not be taxed at this time as a result of Section 1031.  This type of transaction is called a "partial" exchange.

I am happy to report that it is not too late.   As long as the taxpayer has not had a closing and transferred the benefits and burdens of the property that was sold (the relinquished property), a tax deferred exchange (Section 1031 Exchange) can still occur.  If a closing has occurred, it will be too late and that answer still stands even if the taxpayer didn't cash the check they received at closing.