1. Section 1031 Like-Kind
Exchange Guidance
Presented by:
Andy Gelson
Vice President & Assistant General Counsel
Rockland Trust Company
288 Union Street
Rockland, MA 02370
781-982-6738

2. Income Tax Basics
• Income Tax Laws – “Gain” on the sale or exchange of an asset
is taxable income
• “Character” matters – there are different types of income
– Ordinary income (compensation for services, depreciation recapture)
– Capital Gain (short term/long term)
– Active/Passive Income
• Generally, all income is taxed (“recognized”) unless there is
an exception:
– to either defer it (such as a 1031 exchange) or
– exclude it from income (such as the principal residence exclusion)
• Like Kind Exchange is a means to DEFER the tax
– Deferral is a postponement, not forgiveness
– Basis for determining gain is carried over into the replacement property
– Character generally carries over also (recapture)
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3. History of Exchanges
1913 - First income tax
1921 – Like kind exchange first included
1935 - Mercantile Trust of Baltimore– first use of third
party to accommodate an exchange
1979 - T. J. Starker case
1984 - Adoption of 45/180 day rules in 1031
1991 – Finalized IRS Regulations for “Deferred Exchanges”
2000 – IRS adopts safe-harbor for reverse exchanges
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4. Like Kind Exchange Elements
• The same “taxpayer”
• May “exchange”
• Both the old and the new property must be held for use in a
business or investment (“qualified use”)
• The properties must be “like-kind” property
• Gain will be recognized only to the extent that property other
than like-kind property (i.e. “boot”) is received
• Certain property is excluded
– Stock and securities
– Property held primarily for sale (inventory)
– Partnership interests
– Choses in action (legal claims, insurance claims)
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5. Like Kind Exchange – Same Taxpayer
The taxpayer must be the same on BOTH ENDS of the exchange.
This seems simple, but consider…
•Disregarded Entities
– Single member LLC’s
– Grantor trusts
•Partnerships when one or more partners want out
•Trusts that have different TIN but same beneficiaries
•Married couples when both are not on the deed
•Consider effect of changes in ownership
– Before the exchange
– After the exchange
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6. Exchange Element
• Not a matter of intent only, the FORM of the transaction is
critical
• The person with whom the taxpayer does the exchange must
– Acquire the old property from the taxpayer
– Transfer replacement property to the taxpayer
• An exchange can take place in several ways:
• Direct swap (e.g. trade-in of a vehicle to dealer)
• If a direct swap is not possible, it’s necessary to introduce an
“intermediary” in order to create an exchange
• The intermediary transfers the old property to a third party
and acquires and transfers the new property to the taxpayer
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7. Qualified Use
Eligible properties must be used in a business or held for investment
• Personal use does not qualify
– Principal residence
– Vacation home
• Effect of Mixed Business-Personal Use
– Moore v. Commissioner
– Rev. Proc. 2008-16
• Effect of Changes in Use
• Is there a time period that the properties must be “held”?
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8. Like-Kind Standard
Like-kind refers to the “nature or character” and not its “grade or
quality”
• Real estate has a VERY BROAD like-kind standard
• Raw land like kind to multi-family
• Ranch is like-kind to office building
• Fee simple interest is like kind to a perpetual easement
• Fee simple is like-kind to a 30 year or longer ground lease
• Age, condition, occupied or vacant are irrelevant
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9. 1031 Safe Harbors
• Qualified Intermediary Safe harbor
• Qualified Escrow or Trust Safe Harbor
• Interest and Growth Factor Safe Harbor
• Restrictions on Access and Use of Funds (so-called (g)
(6) restrictions”) – No actual or constructive receipt
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10. Qualified Intermediary Safe harbor
• QI must not be a “disqualified person”
• Taxpayer and QI must enter into an exchange agreement
• The old property must be transferred to the QI
• The QI must be obligated to transfer the new property to the
taxpayer
• The taxpayer cannot have actual or constructive receipt of the
proceeds until the end of the exchange period
• The taxpayer has:
– 45 days to identify replacement property ( 3 property or
200% rule)
– 180 days to acquire replacement property
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11. Exchange Funds
• Taxpayer’s access to the funds is limited during the
exchange period
– Can be released at the end of ID period, if no ID
– Unused funds can be released at the end of the
exchange period
– Otherwise can only be used to acquire identified
replacement property
• Safety and security of funds is the most important
concern!
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12. Exchanges - Handling Closing
• Sale proceeds
• Earnest Money Deposits
• Loan Payoffs
• Preparation of Settlement Statement
• Receiving funds at closing
• Financing replacement property
• Paying additional purchase funds
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13. Reverse Exchanges Rev. Proc. 2000-37
• Instead of holding the funds, an intermediary can hold title to the
taxpayer’s intended replacement or relinquished property.
• Taxpayer and the accommodator (EAT) must enter into a written
agreement.
• EAT can’t be a disqualified person, but the EAT can also be taxpayer’s
QI.
• Transfer price is typically fixed by a call option and a put, but the price
cannot be fixed for more than 185 days.
• Taxpayer and EAT may enter into non arms’ length agreements for
loan to acquire the property, management and leasing of the property
so that the taxpayer gets the economic benefit of the property.
• Taxpayer can’t depreciate the property while accommodator owns it.
• Taxpayer has 45 days to ID and 180 days to close, the same as a
deferred exchange.
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14. Like-Kind Exchange Basics
Rules of Thumb
• RP must be of equal or greater value.
• All of the net proceeds from the RQ must be invested in the
RP.
• Must cover all the debt on RQ with debt on the RP or
additional cash (mortgage boot).
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15. Rev. Proc. 2008-16
Safe Harbor for Vacation/Rental Homes
• Creates a safe harbor on whether a mixed vacation/rental
house is considered “held for investment.”
• Before this, there was some doubt as to what standard
applied. Was it the “primary” purpose? Did ANY personal use
disqualify the property from §1031?
• The held for investment requirement applies to both RQ and
RP.
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16. Rev. Proc. 2008-16
Basic Requirements
• Holding Period: 2 years
• Limits on personal use follow IRC §280A.
– Effect of safe-harbor will be to limit personal use of
these properties during the 2 year period to two
weeks or less.
– Before and after the measurement period, there is no
such restriction.
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17. Rev. Proc. 2008-16
RQ Property Requirements:
• Property must have been held for 24 months before the sale.
• During each 12 month period before the sale the property
must meet all of the following:
– The property must have actually been rented out.
– To a person (cannot be related under §267 unless the
residence is the related person’s principal residence).
– For at least 14 days.
– At “fair value.”
• The property cannot have been used for personal purposes for
more than THE GREATER OF:
– 14 days, or
– 10% of the days it was actually rented out.
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18. Rev. Proc. 2008-16
RP Property Requirements:
• The same requirements will apply to the RP (24 month hold,
minimum 14 days of fair value rental, and personal use limit).
• The IRS says that if you do not meet the RP requirements,
you should file an amended return claiming that no exchange
occurred. (This should not be the case, it would be outside the
safe harbor, but would not necessarily mean that the
exchange is a failed exchange…)
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19. PLR 200805012
TDRs as like-kind real estate
• T sold TDRs using QI.
• TDRs were permanent rights to construct higher density
development than was otherwise permitted.
• Used proceeds held by QI to acquire fee interest in real
estate.
• IRS held that TDRs and fee interest were like-kind.
• Same analysis used for easements.
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20. PLR 200813019
Failed LKE as an Installment Sale
• T sold RQ in year 1 using a QI.
• T timely ID’d replacement properties.
• T did not buy any replacement property.
• QI released funds on Day 181, which occurred in year 2.
• T’s CPA treated the transaction as taxable sale in year 1 on a
timely filed return.
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21. PLR 200813019
Failed LKE as an Installment Sale
• Failed LKE is an installment sale.
• T could have treated the transaction as a sale with payment
occurring in year 2.
• Filing of the return showing gain in year 1 was an “election
out” of installment method, revocable only with IRS consent.
• PLR granted permission to revoke election, permitting T to file
amended return for year 1 and reporting the income in year 2.
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22. PLR 200813019
Failed LKE as an Installment Sale
• There may be “time value of money” benefit for small
installment sales.
• When T holds installment paper of more than $5MM, T must
pay a special interest charge on the deferred tax (see:
463A(a)(1)).
• Typical reason for choice of year is matching of gains and
losses.
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23. Bio
Andrew F. Gelson, Esq. (Managing Director) is responsible for
Compass’ strategic, legal, and product development activities. Andy has
27 years of experience practicing real estate and tax law and specializes
in IRC §1031. Prior to co-founding Compass, he was Senior Vice
President and General Tax Counsel at J.P. Morgan Property Exchange Inc.
(JPEX) where he had primary responsibility for executing more than $20
billion of exchange transactions on behalf of corporate and institutional
property owners.
Andy is admitted to the bar in CA and MA and holds a BS from Boston
College, a JD from Southwestern University, and an LLM (in Taxation)
from New York University. He is also an active member of the American
Bar Association (ABA) Tax Section and has spoken before the ABA and
written about various exchange topics, including exchanges of oil and gas
properties. 23

24. If you have any questions relative to this strategy or any other like-kind
exchange questions, please contact:
Andy Gelson
Vice President & Assistant General Counsel
Rockland Trust Company
288 Union Street
Rockland, MA 02370
781-982-6738
Andrew.Gelson@RocklandTrust.com
About Compass Exchange
Compass Exchange Advisors LLC (Compass) is a Qualified Intermediary (QI) focused on providing its clients with
guidance, strategies, and solutions for all their Section 1031 like-kind exchange needs. Our clients own property and
wish to sell property, buy replacement property, and defer paying taxes.
About Rockland Trust
Rockland Trust Company is a full-service commercial bank headquartered in Massachusetts, with $5.7 billion in
assets. Ranked "Highest Customer Satisfaction with Retail Banking in the New England Region" in 2012 by J.D.
Power and Associates, Rockland Trust's network consists of 77 retail branches, 10 commercial lending centers, four
investment management and one residential lending center located throughout Eastern Massachusetts and in Rhode
Island - including nine Central Bank branches, a division of Rockland Trust as of November 10, 2012. To find out why
Rockland Trust is the bank "Where Each Relationship Matters®", please visit www.RocklandTrust.com. Member FDIC.
Equal Housing Lender. 24