In order for the exchanging taxpayer to avoid completely the recognition of the

accrued taxable gain, he or she must acquire a property of equal or greater value than the

relinquished property. In addition, the taxpayer must use all of the net cash proceeds

generated from the sale of the relinquished property to purchase the replacement

property. The transaction is taxable to the extent that (1) the value of the replacement

property is less than the value of the relinquished property and (2) there is cash left over

after the purchase of the replacement property.

Types of Tax-Deferred Exchanges

 There are a number of ways in which a Section 1031 exchange can be structured

involving two or more of the following parties:

* Taxpayer: elects to relinquish his property via a Section 1031 exchange.
* Seller: owns the real estate that the taxpayer acquires as the replacement property.
* Buyer: purchaser of the taxpayer's relinquished property.
* Qualified Intermediary: independent agent who facilitates the exchange. The
 qualified intermediary (QI) takes an assignment of rights in the sale of the
 relinquished property and the purchase contract for the replacement property. In
 short, the QI buys and then resells the properties for a fee.

 Although rare, the two-party exchange is the purest form of exchange. The

transaction involves two parties who simultaneously exchange ("swap") properties. Title

to the relinquished property is conveyed by the taxpayer to the seller and title to the

replacement property is conveyed by the seller to the taxpayer. The two party exchange

in depicted in Figure 1.

 Since the swapped properties are rarely of equal value, the party with the least

valuable position will have to pay cash (or its equivalent) to the other party in order to

balance the equity positions. Cash received as part of the transaction must be recognized


property in a fully taxable sale and not have to pay taxes on gains deferred through one or more Section
1031 exchanges.