The primary benefit of a real estate exchange, is to defer federal and in most cases state income tax, that would be associated with the gain (profit) when disposing of income-producing, investment-held properties and secondary residences. The first step in a deferred exchange is to find a buyer, just like if your transaction were to be treated as a sale. You do not need to find someone who owns a property to exchange or swap with. The structure of a deferred exchange transaction is that you as the taxpayer, (the individual disposing) will transfer title in the relinquished property using the professional qualified intermediary directly to the buyer. The qualified intermediary‚ will utilize the net proceeds received on the disposition from the buyer of the relinquished property, after adjustment to purchase the replacement property. Pursuant to the exchange agreement the taxpayer assigns to the qualified intermediary‚ the rights under the contract of sale to dispose the relinquished property. This arrangement with the qualified intermediary is intended to comply with requirements for a deferred exchange under the provisions of Internal Revenue Code Section 1031. The reason for the professional qualified intermediary’s‚ involvement is to provide services of a qualified intermediary party to the exchange transaction who is not deemed the taxpayer’s agent (known as a disqualified person) for tax purposes. That means, that anyone providing services at the time of the transaction or within a twenty-four month period in the past cannot provide services as a qualified intermediary. That includes the taxpayer’s attorney, accountant/C.P.A., real estate agent/broker, mortgage banker/broker, employee, family-member or anyone else who has or had an agency relationship with the taxpayer. The professional qualified intermediary should have special training in this area and should be experienced in providing these services. Since the receipt of proceeds, (actual or constructive) from the disposition of the relinquished property by the taxpayer, or the taxpayer’s agent, would invalidate the attempted exchange transaction. Internal Revenue Code Section 1031 provides two specific time restrictions, which if not met, will disqualify a deferred exchange for non- recognition treatment. The first is that the Replacement Property to be acquired must be identified within 45 days (identification period) after the taxpayer transfers the Relinquished Property. The second is that all replacement properties which the taxpayer will acquire must be transferred to the taxpayer, no later than the earlier of (i) 180 days (exchange period) after the date the taxpayer disposes of the relinquished property (including, in said computation, both the day of disposition of the relinquished property and the day of acquisition of the replacement property), or (ii) the due date (with extensions) of your federal income tax return. These deadlines are both absolute. When the taxpayer has located and negotiated an acquisition agreement (purchase agreement) for the replacement property, the qualified intermediary will prepare an assignment agreement. The execution of this assignment will assign the taxpayers purchase rights to the qualified intermediary, which will then complete the purchase, using funds up to the total available in the qualified escrow account. As long as the taxpayer acquires their replacement property for at least equal or greater value of their relinquished property then the taxpayer will defer any gain/profit indefinitely. The taxpayer has the opportunity to perform a 1031 Exchange in order to pay no tax over and over. Russell Gullo, CCIM, CEA, is a certified exchange advisor, president of R. J. Gullo & Co., Inc., West Seneca, N.Y.