Title West Exchange is your Qualified Intermediary in 1031 Tax Deferred Exchanges.

If you own an income or investment property, you need to know about 1031 tax deferred exchanges. Why? The 1031 may be the best tax shelter left in real estate. By exchanging your property for another property of like-kind, you, the investor, have more money to either trade up to a more valuable piece of property or utilize the additional leverage to acquire multiple properties because your taxes are not paid, but rather deferred until the ultimate sale of the property.

YOUR NEED FOR TW EXCHANGE
One of the things that must occur in order to comply with the provisions of section 1031 is the proceeds of the sale must not be in the control of the seller/taxpayer. If the taxpayer has constructive receipt of the sales proceeds, the exchange will be disallowed by the IRS. IRS regulations specifically allow for the use of a qualified intermediary to hold the exchange funds during the exchange period and thus the taxpayer avoids constructive receipt of the sales proceeds. TW Exchange is an affiliate of Title West; we have an attorney on staff and will handle your exchange with the utmost care and professionalism. Our exchange program is designed for speed, accuracy and safety. Every aspect of the exchange is managed in accordance with IRS rules and regulations. So, relax and let TW Exchange guide you through the exchange process.

HOW IS THE 1031 EXCHANGE BENEFICIAL TO YOU?
When you defer the tax due on an exchange, you are able to move from one investment directly into another without having to liquidate other investments or purchase less valuable property in order to pay the taxes that would normally be generated by a sale. This tax deferment frees funds for new purchases, capital improvement, research and development, etc. When capital gains are saved, property can be offered at a more competitive price. In addition, a property which may be difficult to finance, can be exchanged.

WHAT IS A 1031 TAX DEFERRED EXCHANGE?
A tax deferred exchange is a transaction involving the transfer of one piece of investment or income property and the receipt of replacement property which will be used as income or investment property. When certain criteria are met, as defined in Internal Revenue Code Section 1031, the taxes on any capital gain realized from the sale of the relinquished property are deferred until some time in the future, usually when the replacement property is sold. The transaction is basically little different from an ordinary sale and purchase of property, except that certain documentation must be present to show that the transfers are intended to be part of an exchange and not a sale.

The Rule:
Under IRC Sec. 1031, neither gain nor loss is recognized when property held for productive use in trade or business or for investment, is exchanged solely for like-kind property to be held either for productive use in a trade or business or for investment. The exception only applies to the current recognition of gain realized. The realized gain is deferred until the replacement property is transferred in a later taxable transaction. Thus, the deferred gain is only potentially taxable. It may be avoided altogether if the replacement property is held by the taxpayer upon death when its basis is stepped up to the date-of-death value.

One of the rationales offered as justification for non-recognition of gain or loss on an exchange is continuity of investment or liquidity. The continuity of investment or liquidity rationale for non-recognition or gain or loss on an exchange derives from Congress' concern that:

"If the taxpayer's money is still tied up in the same kind of property as that which it was originally invested, he is not allowed to compute and deduct his theoretical loss on the exchange, nor is he charged with the tax upon his theoretical profit. The calculation of profit or loss is deferred until it is realized in cash, marketable securities, or other property not of the same kind having a fair market value."

This rationale is also based upon congressional concern that taxpayers would not have the cash to pay the tax if an exchange triggered recognition of the gain.

History
When income taxes were first imposed in 1918, gain or loss recognition was required on all dispositions of property. Provision for non-recognition of gain or loss on the exchange of property was introduced in 1921. The general rule providing for the recognition of gain or loss upon the sale of property contains a number of exceptions: IRC Sec. 1032 (stock for property); 1033 (involuntary conversions); 1035 (insurance policies); 1036 (stock for property); 1037 (United States obligations);1038 (reacquisition of real property); 1040 (real property in satisfaction of pecuniary bequest); 1041 (transfer of property between spouses or incident to divorce); 1042 (sale of stock to employee stock ownership plans or certain cooperatives); and several others. One of these exceptions is IRC Sec. 1031. After the non-recognition provisions were enacted, gains realized from appreciated securities investments were not recognized if such securities were swapped or traded for other securities. At the same time, losses could be recognized by selling such securities. Limitations on the scope of the exchange activities were enacted in 1923 by excluding stocks, bonds, notes, choses in action, trust certificates and other securities from the non-recognition provisions of the Revenue Act of 1921. The substantive provisions of IRC Sec. 1031 remained basically the same between 1928 and 1984 when time limits were introduced for non-simultaneous exchanges and interests in partnership were added to the types of properties excluded from non-recognition treatment.

Prior to the 1991 amendments to IRC Sec. 1031 a number of unresolved and questionable areas existed which frustrated practitioners and taxpayers alike. To a large extent, IRC Sec. 1031 exchanges were engaged in by aggressive investors who took such action aware the risk existed that transactions might be denied non-recognition treatment. Small investors were hesitant to take the chance. Moreover, they were hesitant to incur the expense involved in obtaining competent tax advice on the structuring of such transactions.

This all changed with the deferred exchange Regulations which were effective in April 1991. The Regulations presented a detailed process or method for identification of replacement property; the time limits were defined and explained; the deferred exchange was defined; and a special rule was provided for improvements to be built as replacement property. The Regulations, having addressed the problems created by the 1984 amendments which permitted deferred exchanges, have greatly encouraged exchanges.

Statutory Requirements:
IRC Sec. 1031 provides that "No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like-kind which is to be held either for productive use in a trade or business or for investment", IRC Sec. 1031(a)(1).

The following requirements must be met to effect a tax free exchange:

1. Property, whether real or personal, is required.
2. Property must be held for a qualified purpose.
3. Property relinquished must be like-kind with replacement property.
4. An exchange is required.

The Qualified Intermediary:
The Regulations create four Safe Harbors whose use will result in the determination that the taxpayer is not in actual or constructive receipt of money or other property for purposes of IRC Sec. 1031. One of these Safe Harbors is the use of a Qualified Intermediary. There is a high degree of flexibility in structuring exchanges with an intermediary. When an intermediary is used, care should be exercised in selecting one who will satisfy the practical consensus of the taxpayer and ensure that the transaction qualifies under IRC Sec. 1031.

The intermediary should be a corporation instead of an individual primarily because death or incapacity of an individual intermediary would affect a deferred exchange. Probate for example, could delay timely closing of the replacement property transaction. An intermediary must be reliable and trustworthy to ensure that the exchange funds are available for the closing of the replacement property transaction. One should always require that funds from the disposition of the relinquished property be held in trust for the taxpayer. If the intermediary holds such funds as a principal, concern will arise as to whether liens or judgments against an intermediary may attach to such funds.

TIME CONSTRAINTS
The Exchangor has a maximum of 180 days from the closing of the relinquished property or the due date of that year's tax return, whichever occurs first, to acquire the replacement property. This is called the Acquisition Period. The first 45 days of that period is called the Identification Period. During the 45 days, the exchangor must identify the property which will be used for replacement. The identification must be in writing, signed by the exchangor, and received by the facilitator or other qualified party, faxed, postmarked or otherwise identifiably transmitted (such as Federal Express or other dated courier service). Failure to accomplish this identification within the 45 day period will cause the exchange to fail. TW Exchange will guide you through all the technical details of the exchange process.

In general, Section 1031 of the Internal Revenue Code allows an owner to exchange one property for another and defer payment of state and federal capital gains taxes, as long as both properties are of "like-kind." With real estate, this simply means that the properties must be either 1) held for productive use in a trade or business, or 2) held for investment. For example, while your personal residence is not like-kind property, and thus does not qualify as exchange property, another single family rental home in Salt Lake City may be exchanged for a commercial building in California; or an apartment in Florida may be exchanged for industrial land in Texas. Raw land can be exchanged for an office building, apartments for commercial or retail properties, or residential for raw land. This excludes such items as:

• stock in trade or other property held primarily for sale;
• stocks, bonds or notes;
• other securities or evidences of indebtedness or interest;
• interest in a partnership;
• certificates of trust or beneficial interest; or
• choses in action.

STEPS TO TAKE IN AN EXCHANGE
The exchangor (possibly using a broker) finds a buyer for the selling property. (This could also be a direct exchange.) The property is then handled by the qualified intermediary, e.g., TW Exchange, who sells it to the buyer. The money pays off any debt and the remainder is held by the qualified intermediary. Exchangor chooses as many as three or more like-kind properties (depending on the conditions) within the 45 days after closing. The funds held by the qualified intermediary are then used to make the purchase of the new property before the end of 180 days. Notice, as required by law, the funds were never under the control of the exchangor.

WHO IS INVOLVED IN AN EXCHANGE?

1. Investor/Taxpayer/Exchangor As the person selling your property, you can be referred to by any of these names.
2. Buyer The person buying your property. This person pays money to the intermediary and then receives the deed.
3. Intermediary This is the role TW exchange plays, ensuring that all of the regulations are followed and placing the funds in an escrow account until the exchange is completed.
4. Seller The person selling their property to you. This may not be the person who is purchasing your property in the exchange.

IDENTIFYING AN APPROPRIATE PROPERTY
Three rules exist for the correct identification of replacement properties.

1. The Three Property Rule dictates that the investor may identify three properties of any value, one or more of which must be acquired within the 180 Day Acquisition Period.
2. The Two Hundred Percent Rule dictates that if more than three properties are identified, the aggregate market value of all properties may not exceed 200% of the value of the property which was sold.
3. The Ninety-five Percent Exception dictates that in the event the other rules do not apply, if the replacement properties acquired represent at least 95% of the aggregate value of properties identified, the exchange will still qualify.

WHAT SETS TW EXCHANGE APART FROM THE REST?
The principals at TW Exchange have a depth of experience with 1031 exchanges that is second to none. Our experience with non-routine exchanges provides knowledge and know-how to deal with virtually any issue that may arise in these highly complex transactions. TW Exchange provides value to you; we charge no back-end fees and you keep all the interest on your funds. We specialize in:

• Improvement Exchanges
• Reverse Exchanges
• Simultaneous Exchanges
• Leasehold Improvement Exchanges
• Vacation Home Exchanges

GLOSSARY

Basis The adjusted basis of property, which is generally the cost of the property reduced by accumulated depreciation.

Boot Cash, debt relief, or other property received by the taxpayer that does not qualify for a tax free exchange under section 1031 of the tax code.

Deferred Exchange An exchange of like-kind property which, pursuant to an exchange agreement, the taxpayer transfers like-kind property and subsequently receives like-kind property. If the requirements for identification and receipt of replacement property are not met within the specified time frame, the property received will be considered not like-kind. The regulations also provide that if the taxpayer is in actual or constructive receipt of sale proceeds, the transaction will constitute a sale rather than an exchange.

Deferred Gain The excess of Gain Realized over Gain Recognized.

Exchange Period The period between the disposition property close of escrow and the replacement property close of escrow. The exchange period is the sooner of 180 calendar days after the transfer date of the relinquished property or the date the taxpayer's federal income tax return is filed for the year in which the exchange occurred, unless an extension is obtained, in which event the exchange period will be the full 180 days.

FMV Fair market value

Gain or Loss Realized The economic gain or loss to the taxpayer whether or not the gain is taxed or the loss is deducted.

Gain or Loss Recognized The portion of Gain Realized that is taxed or the portion of Loss Realized that is deducted.

Identification Period The 45 day period after the close of escrow of the relinquished property.

Relinquished Property The property the taxpayer is disposing of.

Replacement Property The property the taxpayer is acquiring.