The Internal Revenue Code allows taxpayers to avoid recognition of gain upon if property held by the taxpayer for productive use in a trade or business or for investment (“relinquished property”) is exchanged for property of like kind which is also held for either of such purposes (“replacement property”). Such a transaction is often referred to as a “1031 exchange” or a “like kind exchange”. A taxpayer can also avoid recognition of gain in a transaction known as a “deferred like kind exchange.” In such an exchange, a taxpayer sells the relinquished property, escrows the sale proceeds, then uses sale proceeds to acquire the replacement property from a third-party. Related transactions include what is known as a “reverse like kind exchange” (where the replacement property is first acquired, then the relinquished property sold) and an “improvements exchange” (where relinquished property is sold, improvements made upon the replacement property, then the replacement property is acquired by the taxpayer). In order to obtain such nonrecognition treatment, each of these transactions requires a taxpayer to comply with a number of requirements, many of which are rigid and technical. In addition, such transactions often require the use of an escrow agent, or more particularly, a “qualified intermediary”. We regularly assist clients with navigating these requirements and often serve as a qualified intermediary.
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