Do I have to spend all of the proceeds from my relinquished property on replacement property?

No, you do not, however you will be taxed on the amount you do not spend. Unused proceeds are known as "boot" and are taxed on their face value at the capital gains tax rate.

If I do not spend all of my proceeds when can I receive the unused amount?

You can receive unused proceeds at anytime after you have acquired each one of the properties identified in your 45-day identification. If you do not acquire all of the properties identified in the 45 day identification, then the unused proceeds cannot be released until the earlier of the due date of your tax return including extensions, or 180 days after the closing of the sale of the relinquished (exchange) property.

Can I take a note on the sale of my relinquished property?

Yes, you can sell your relinquished property using a Note & Trust Deed to finance the sale. It is possible for the promissory Note and Trust Deed to be made out to the "Exchanger". If this is done, the Note is taxable and may not be used to buy replacement property.

However if the Note & Trust Deed is made out in the name of the Qualified Intermediary. You have four choices on how to use it to buy replacement property:

1.      You can use it to acquire replacement property by trading it to the "Seller " for part of the equity in the new
property (that is spend it like it was cash).

2.      You can instruct the Qualified Intermediary to sell the note on the open market (you can negotiate this sale
or have the Intermediary do it) and add the amount realized to the exchange proceeds. This will give you all cash to negotiate your replacement purchase. It is less desirable because of the discount given on the sale of the note.

3.      A party related to the "Exchanger" such as a closely held corporation or relative can either purchase the Note from the Qualified Intermediary, or provide financing so that the Qualified Intermediary receives all cash at closing. You should consult with your tax advisor regarding structuring this type of transaction.

4.      You can wait until the end of the exchange and receive the note back from the Intermediary. This will result
in the note becoming "boot" and it will be taxable. However, you will only have to pay tax on the amount received each year.

What should I know about new construction of replacement property?

There are two ways that new construction is handled in an exchange:

1.      You contract with a builder to purchase a property, which will be completed, and closed, before the end of the 180-day exchange period. You can purchase the land before construction as one of your replacement properties, or you can purchase the land & building from the builder at the time of closing. This is the least expensive and easiest method for the exchanger.

2.      You can contract to do what is known as a "Build-out Exchange". This is where the exchanger finances all or part of the construction. Through a special agreement with the Qualified Intermediary, the builder draws on the exchange proceeds as certain steps of the construction are completed. This arrangement is much more complicated and risky for the Exchanger, and the Intermediary, and increases the cost of the exchange by $1,500 or more.

In either case the purchase and sale agreement should have language in it that requires the builder to bear responsibility for the exchangers taxes if the exchange fails due to the completion of the construction later than the required 180 day exchange closing period.

When should I open escrow on my Replacement Property?

The safest way is to wait until after your "Relinquished" property has closed. The opening of escrow (or notification to the closing agent) may constitute identification as the escrow agent is listed by the IRS as a person involved in the exchange {1.1031(k)-1(c)(2)(ii) example}, and if it is done prior to the closing of the "Relinquished" property it can shorten the entire exchange period to 45 days. It is a dangerous practice and does not speed up the "replacement" property closing. Replacement property is identified if it is designated as replacement property in a written document signed by the taxpayer and sent to the Qualified Intermediary before the end of the 45-day identification period.