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Course Details

Concepts and Mechanics of Exchanges (Course Id 231)

Updated / QAS / Registry / EA
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Author : Danny C Santucci, JD
Course Length : Pages: 152 ||| Review Questions: 80 ||| Final Exam Questions: 80
CPE Credits : 16.0
IRS Credits : 16
Price : $125.95
Passing Score : 70%
Course Type: NASBA QAS - Text - NASBA Registry - IRS Enrolled Agents
Technical Designation: Technical
Primary Subject-Field Of Study:

Taxes - Taxes for Course Id 231

Description :

While tax reform visions have changed the tax on profits realized from the disposition of real estate, investors still seek escape hatches from the capital gain tax. Tax-deferred exchanges permit the disposition of property often with the taxpayer receiving significant cash but without the payment of any tax. Functionally, an exchange is a bridge over the normally taxable event of moving from one property to another. This course alerts the practitioner to the different planning opportunities that surround exchanging. Participants will be able to identify, analyze, and handle effectively the complex tax problems that arise under 1031. This understanding will be directly applied to the structuring and audit survival of multi-party and delayed exchanges.

Usage Rank : 10000
Release : 2023
Version : 1.0
Prerequisites : General understanding of federal income taxation.
Experience Level : Overview
Additional Contents : Complete, no additional material needed.
Additional Links :
Advance Preparation : None.
Delivery Method : QAS Self Study
Intended Participants : Anyone needing Continuing Professional Education (CPE).
Revision Date : 24-Oct-2023
NASBA Course Declaration : Participants must complete the final examination within one year of purchase and with a minimum passing grade of 70% or better to receive CPE credit unless otherwise noted on the Course History page (i.e. California Ethics must score 90% or better). After logging in click on the Course History links on your My Courses page for the Begin date and Expire date for the Final Exam.
Approved Audience :

NASBA QAS - Text - NASBA Registry - IRS Enrolled Agents - 231

Keywords : Taxes, Concepts, Mechanics, Exchanges, cpe, cpa, online course
Learning Objectives :

As a result of studying each assignment, you should be able to meet the objectives listed below each assignment.

Chapter 1                Introduction - §1031

       At the start of Chapter 1, participants should identify the following topics for study:

    * Tax Reform Act of 1986
    * Reform Act of 1997, Budget Act of 1998 & 2003 Bush Tax Act
    * Tax Reform of 1986 & Revenue Act of 1987
    * Disposition of Installment Note
    * Stepped-Up Basis on Death
    * Related Parties
    * Security Issues
    * Exchange Benefits
Learning Objectives:

       After reading Chapter 1, participants will be able to:
    1. Identify factors that determine the popularity of exchanging, specify tax law changes influencing exchange popularity and the impact of current capital gains rates, recognize the capital gain rate "baskets" and determine the tax treatment of assets in each category.
    2. Recognize the differences between exchanges and installment sales and the cost benefits of each, identify several advantages given to exchanging by recent legislation and specify continuing problems that can arise with an installment sale that can act as an impetus for using an exchange.
    3. Specify multiple tax benefits of exchanges and the advantages they create over installment sales and determine issues that can be resolved or facilitated by using a like-kind exchange.
Chapter 2                Section 1031 & Its Function

       At the start of Chapter 2, participants should identify the following topics for study:

    * Code language
    * Section 1031 as an exception to the general rule of taxation
    * Concept of tax deferral
    * Rationale
    * Continuity of investment
    * Administrative convenience
    * IRS position
    * Mandatory application
Learning Objectives:

       After reading Chapter 2, participants will be able to:
    1. Determine the conceptual changes made to §1031 by the TRA ’84, TRA ’86, the Revenue Act of 1987, and the RRA ’90 and specify the current provisions of §1031 by:
      a. Identifying the differences in §1031 from the general rule of taxation under §1001;
      b. Recalling its legislative evolution; and
      c. Recognizing the original Congressional rationale of §1031 contained in the concepts of continuity of investment and administrative convenience.
    2. Specify instances where the IRS may assert an unintended mandatory application of §1031.
Chapter 3                Statutory Requirements & Definitions

       At the start of Chapter 3, participants should identify the following topics for study:

    * Qualified transaction – exchange v. sales
    * Held for productive use or investment
    * Change in property’s character
    * State of mind concept
    * Same taxpayer requirement
    * Former statutory exclusions from §1031
    * Real property restriction
    * Like-kind property
    * Former like-kind requirement for personal property
    * Multiple asset exchanges
    * Real v. personal property
Learning Objectives:

       After reading Chapter 3, participants will be able to:
    1. Specify the elements §1031 and how these elements conceptually differentiate a like-kind exchange from a sale.
    2. Identify excluded property types from qualified property types by determining the meaning of the phrases “held for productive use in a trade or business,” “productive use,” and “investment purpose” specifying the impact of time and taxpayer intent.
    3. Recognize the state of mind issues in the concept “held for productive use in trade or business or for investment” and how qualifying use can ease qualification, determine the differences between §1031 and old §1034, and cite the same taxpayer requirement and its unsettled caselaw.
    4. Specify the former statutory exclusions from §1031 and the types of property that were specifically excepted.
    5. Identify the like-kind requirement as it impacts real estate and personal property, and recognize the former classification systems that permitted clients to exchange like-kind or like-class personal property.
Chapter 4                The Concept of “Boot”

       At the start of Chapter 4, participants should identify the following topics for study:

    * Partial tax-deferral
    * Examples of boot
    * Realized gain
    * Recognized gain
    * Limitation on recognition of gain under §1031
    * The definition of “boot”
Learning Objectives:

       After reading Chapter 4, participants will be able to:
    1. Identify “boot” and like-kind property specifying boot's potential impact on nonrecognition and list several examples of boot.
    2. Determine taxable "boot," specify the differences between realized gain and recognized gain recalling the limitation on recognition of gain under §1031 that prevents a taxpayer from being taxed greater than if he had sold the property, and recognize taxable “boot’s” net effect.
Chapter 5                The Rules of “Boot”

       At the start of Chapter 5, participants should identify the following topics for study:

    * Property boot
    * Mortgage boot
    * Debt relief
    * Liability or notes created during the exchange
    * Netting boot – the rules of offset
    * Property boot given offsets any boot received
    * Mortgage boot given offsets mortgage boot received
    * Mortgage boot given does not offset property boot received
    * R.R. 72-456 & commissions
    * Net taxability of gain
Learning Objectives:

       After reading Chapter 5, participants will be able to:
    1. Determine mortgage boot and property boot identifying whether a taxpayer has given or received boot in an exchange and the related tax consequences.
    2. Identify the popular and alternate offset rules used to determine net boot, specify techniques to limit net taxable boot such as adjusting mortgages before an exchange and treating closing costs according to R.R. 72-456, and recognize the taxability of gain rule to reflect netting.
Chapter 6                Losses in an Exchange

       At the start of Chapter 6, participants should identify the following topics for study:

    * Losses on like-kind property
    * Losses on non-like-kind property
Learning Objectives:

       After reading Chapter 6, participants will be able to:
    1. Identify the categories of property received in an exchange and which category is permitted to recognize loss, recognize how avoiding §1031 can allow clients to potentially increase recognizable losses, and determine the tax treatment of non-recognized losses under §1031.
Chapter 7                Basis on Tax-Deferred Exchange

       At the start of Chapter 7, participants should identify the following topics for study:

    * Adjustments to basis
    * Allocation of basis
    * Anti-churning rules
Learning Objectives:

       After reading Chapter 7, participants will be able to:
    1. Identify the general carryover basis rule to calculate a taxpayer’s basis in acquired property by determining its application and specifying the related allocation of basis to multiple properties and boot in an exchange.
Chapter 8                Depreciation, Cost Recovery, MACRS & Recapture

       At the start of Chapter 8, participants should identify the following topics for study:

    * ERTA
    * TRA ’86 & OBRA ‘93
    * IRS depreciation guidance
    * Land v. improvements
    * Section 1245 & Section 1250
    * Recapture property
    * Recapture exceptions prior to ERTA
    * Issues after ERTA
    * Allocation of basis when recapture applies
    * Investment credit recapture
Learning Objectives:

       After reading Chapter 8, participants will be able to:
    1. Identify property depreciation under §167 particularly as it applies to property used in a taxpayer’s trade or business or held for the production of income and the impact of ERTA, TRA ’86, OBRA ’93, and TCJA, determine the changes made by Notice 2000-4, and cite the depreciation requirements of later regulations affecting recovery periods and depreciation methods.
    2. Recognize the distinction between land and depreciable improvements, and identify the recapture provisions and their impact on the rate to be applied to all or a portion of the gain that would otherwise be recognized.
Chapter 9                Miscellaneous Aspects

       At the start of Chapter 9, participants should identify the following topics for study:

    * Holding period
    * Treatment of gain or loss
    * Treatment of installment sales prior to 1980
    * Treatment of installment sales after 1980
    * Exchanges between related parties
    * Two-year limitation
    * Sections 267, 707, 453 and 1239
    * Leverage
    * Splitting partners
    * Reporting an exchange
Learning Objectives:

       After reading Chapter 9, participants will be able to:
    1. Specify the holding period of acquired property, identify the character of gain or loss recognized in an exchange, recall the evolution of the installment sale method and the current rules related to exchanges and determine the formula for gain recognized using gross profit, selling price and total contract price under §453.
    2. Recognize the danger of exchanges between related parties by:
      a. Specifying the two-year limitation on such exchanges by;
        i. Determining related parties;
        ii. Identifying the special holding period rule;
        iii. Selecting at least three types of dispositions that will not invalidate the nonrecognition treatment on an original exchange; and
        iv. Citing the avoidance exception to §1031; and
      b. Identifying how §§267, 707, 453, and 1239 work together with §1031.
    3. Recognize how leveraging can be useful in a §1031 exchange, specify ways to cash out one or more partners as part of an exchange by a partnership and choose the proper tax forms to report an exchange.
Chapter 10                Mechanics

       At the start of Chapter 10, participants should identify the following topics for study:

    * Meeting the napkin test
    * Components
    * Figures for computation
    * Economic balance & “evening out”
    * Examples of balancing multiple-party exchanges
    * Locating boot
    * Finding exchange property
    * Refinancing
    * “Coleman” solution
    * Wrap-around mortgage
Learning Objectives:

       After reading Chapter 10, participants will be able to:
    1. Recognize a simple test that permits clients and their advisors to determine if an exchange is completely tax-deferred and the components of this test, identify the basic computation figures necessary to economically balance an exchange, and specify methods of evening out to ensure that all parties get the same value as they give.
    2. Determine how to balance multiple party exchanges using the in and out test determining net boot, select optimal exchange property to minimize taxable gain, and identify how to use refinancing, the “Coleman” solution, a wrap-around mortgage, or a tax-free “cash out” to balance out an exchange.
Chapter 11                Types of Exchanges

       At the start of Chapter 11, participants should identify the following topics for study:

    * Two-party exchanges and variation
    * Three-property-plus exchanges and variation
    * Three-party “Alderson” exchange and variations
    * Three-party “Baird Publishing” exchange and variations
    * Four-party “Coupe” exchange
    * Four-party “Mercantile Trust” exchange
Learning Objectives:

       After reading Chapter 11, participants will be able to:
    1. Identify the mechanics of a two-party and three-party exchange including related variations involving the cash out of a party.
    2. Determine the transactional flow of a traditional three-party “Alderson” exchange including variations to the format, recognize the respective parties' tax consequences, and recall procedural guidelines to ensure mechanics comply with §1031 provisions.
    3. Determine the elements of a three-party “Baird Publishing” exchange and an “Alderson” exchange, specify variations of the “Baird Publishing” exchange and situations when each is the preferred format to use, identify categories of four-party exchanges, and specify when conditions favor the use of a four-party “Coupe” exchange or a four-party “Mercantile Trust” exchange.
Chapter 12                Delayed Exchanges

       At the start of Chapter 12, participants should identify the following topics for study:

    * Delayed exchange v. delayed close
    * Previously used formats
    * Starker case
    * TRA ‘84
    * Format & structure
    * Security for performance – use & control of cash
    * Delayed (deferred) exchange regulations
    * Identification requirements
    * Actual & constructive receipt rule
    * Delayed exchange agreement
Learning Objectives:

       After reading Chapter 12, participants will be able to:
    1. Identify the distinctions between delayed exchanges and delayed closes particularly as to simultaneity, recall the evolution of delayed exchange requirements from the Starker case through the restrictive TRA ’84 time limits to the present and the popularity of delayed exchanges and specify unresolved issues for delayed exchanges.
    2. Recognize the requirements of the final regulations for delayed exchanges by:
      a. Identifying the effective date for the regulations;
      b. Specify the differences between delayed exchanges and “reverse-starker” transactions;
      c. Determining the delayed exchange identification requirements by:
        i. Specifying the identification and exchange periods;
        ii. Identifying replacement property;
        iii. Specifying requirements to revoke the identification of property;
        iv. Recognizing the substantial receipt requirement; and
        v. Selecting multiple replacement properties according to the requirements of Reg. §1.1031(a)-1(c)(4)(i)(A); and
      d. Identifying whether a taxpayer is in actual or constructive receipt of money by recalling the safe harbors that can be used without risk of actual and constructive receipt.
Chapter 13                Warehousing & Pot Method

       At the start of Chapter 13, participants should identify the following topics for study:

    * Warehousing
    * Reverse exchanges – R.P. 2000-37
    * R.P. 2004-51
    * The pot method
    * Escrow
Learning Objectives:

       After reading Chapter 13, participants will be able to:
    1. Identify the purpose of a longtime exchange technique called “warehousing,” specify the procedural aspects of reverse exchanges under R.P. 2000-37 and variables impacting its application, recognize the “pot” method recalling the procedural role of “strawmen,” and determine the role of exchange escrows.
Chapter 14                Accommodators & Intermediaries

       At the start of Chapter 14, participants should identify the following topics for study:

    * Roles of accommodators
    * Sale & lease-back
Learning Objectives:

       After reading Chapter 14, participants will be able to:
    1. Identify the differences between an accommodator and an intermediary, determine how using such parties can facilitate exchanging by avoiding certain holding problems, multiple parties and properties, and transfer difficulties, and recognize a sale and lease-back transaction and associated exchange complications.
Course Contents :

Chapter 1 - Introduction - §1031

Taxes & Exchange Popularity


Tax Reform Act of 1986

Later Tax Legislation

Impact & Summary

Exchanging vs. Installment Sales

Tax Reform Act of 1986

Revenue Act of 1987

Continuing Problems

Disposition of Installment Note

Stepped-up Basis on Death

Related Parties

Security Issues

Exchange Benefits

Chapter 2 - Section 1031 & its Function

Code Language

Section 1031 as an Exception to General Rule of Taxation

Concept of Tax Deferral

History of Provision


Continuity of Investment

Administrative Convenience

IRS Position

Mandatory Application

Chapter 3 - Statutory Requirements and Definitions

Qualified Transaction - Exchanges v. Sales

Definition of an Exchange

Contractual Interdependence Test

Integrated Plan Test


Intent of the Parties

Held for Productive Use or investment


Productive Use

Retired Property

Investment Purpose

Use by Relatives

Vacation Homes

Moore Decision

R.P. 2008-16

Change in Property’s Character

Conversion of Personal Use Property


Pre-Existing Plans & Contracts

Acquisition Purpose

State of Mind Concept

Focused Analysis - Taxpayer-By-Taxpayer Application

Combining Qualifying Use

Section 1034 Confusion

Same Taxpayer Requirement

Caselaw & Ruling Developments



LTR 199911033

Property Exclusions & Restrictions under §1031

Real Property Only Restriction - §1031(a)(1)

Exception for Real Property Held Primarily for Sale - §1031(a)(2)

Question of Intent

Dealer Issue

Former Personal Property Exclusions - Old §§1031(a)(2)&(j)

Stock In Trade or Other Property Held Primarily For Sale

Stocks, Bonds, or Notes

Other Securities or Evidences of Indebtedness or Interest

Interests in a Partnership

Existing Partnerships

1991 Final Regulations

Certificates of Trust or Beneficiary Interests

Choses in Action

Like-Kind Property

Nature or Quality of Property

Qualified §1031 Exchange of Personal Property Repealed

Requirements for Personal Property - Prior to 2018

Like-Kind Requirement for Personal Property

Like-Kind Personal Property - Identical

Like Class Personal Property - General Asset or Product Class

Five, Four, Then Six Digit Product Classes

Property Held for Investment

Other Personal Property

Multiple Asset Exchanges

Exchange Groups

Aggregation & Allocation

Residual Group


Real v. Personal Property

Real Property Defined for Like-Kind Exchanges - Prop. Reg.

Inherently Permanent Structures: Buildings and Machinery

Inherently Permanent Structures: Structural Components

Unsevered Natural Products are Real Property

Intangible Assets as Real Property

Incidental Personal Property and Qualified Intermediaries

State Law


Land vs. Improvements

General Rules


Chapter 4 - The Concept of “Boot”

Partial Tax-Deferral

Examples of Boot

Realized and Recognized Gain

Realized Gain

Recognized Gain

Limitation on Recognition of Gain under §1031

The Definition of “Boot”

Chapter 5 - The Rules of “Boot”

Property Boot and Mortgage Boot

Property Boot

Mortgage Boot

Debt Relief

Debt Relief Is the Equivalent of Cash

Liability or Notes Created During the Exchange

Netting “Boot” - The Rules of Offset

Property Boot Given Offsets Any Boot Received

Mortgage Boot Given Offsets Mortgage Boot Received

Adjustments to Mortgages During Exchange

LTR 9853028

Mortgage Boot Given Does Not Offset Property Boot Received

Biggs Case

Behrens Case

R. R. 72-456 & Commissions

Non-Deductible Closing Costs

Permissible Trade Down

Affect on Basis

Net Taxability of Gain

Comment on Alternative Offset Rules

Chapter 6 - Losses in an Exchange

Like-Kind Property

Non-Like-Kind Property Given

Chapter 7 - Basis on Tax-Deferred Exchange

Adjustments to Basis

Allocation of Basis

Anti-Churning Rules

Under ERTA

Under TRA ‘86


Property Placed in Service Prior to 1981

Property Placed in Service from 1981 Through 1986

Chapter 8 - Depreciation, Cost Recovery, Macrs, and Recapture


TRA ‘86 & OBRA ‘93

IRS Depreciation Guidance - Notice 2000-4 & Regs


Land vs. Improvements

New Allocation on Exchange

Recapture of Depreciation

Section 1245

Section 1250

Recapture Property

Exchange Impact

Recapture Exceptions Prior To ERTA

§1250(d) Exception

§1245 (b) Exception

Issues after ERTA

TRA ‘86

Allocation of Basis When Recapture Applies

Investment Credit Recapture - Long Gone

Chapter 9 - Miscellaneous Exchange Aspects

Holding Period

Strict View

Treatment of Gain or Loss

Installment Sales Reporting

Treatment Prior to 1980

Treatment After 1980



Exchanges between Related Parties

Two-Year Limitation

Related Parties - §267(b)

Special Holding Period Rule


Avoidance Exception to §1031

Sections 267, 707, 453, & 1239


Splitting Partners

Reporting an Exchange

Schedule D & Form 4797

Form 8824


Chapter 10 - Exchange Mechanics


Meeting the Napkin Test


Figures for Computation

Economic Balance & “Evening Out”

Balancing Multiple Party Exchanges

Examples of Balancing Multiple Party Exchanges

Locating Boot

Finding Exchange Property

Trade-Up Rule

Exchange Groups


“Coleman” Solution

Wrap-Around Mortgage

Tax-Free “Cash Out”

Chapter 11 - Types of Exchanges

Two-Party Exchanges

Variation #1 On Two-party Exchanges

Three-Property-Plus Exchanges

Variation on Three-Property Exchange

Three-Party “Alderson” Exchange

Variation #1 on Three-Party “Alderson” Exchange

Variation #2 on a Three-Party “Alderson” Exchange

Variation #3 on Three-Party “Alderson” Exchange

Variation #4 on Three-Party “Alderson” Exchange

Three-Party “Baird Publishing” Exchange

Variation #1 on Three-Party “Baird Publishing” Exchange

Variation #2 on Three-Party “Baird Publishing” Exchange

Four-Party Exchanges

Four-Party “Coupe” Exchange

Four-Party “Mercantile Trust” Exchange

Chapter 12 - Delayed Exchanges

Delayed Exchange vs. Delayed Close

Chaos Factor


Old Main Stream Formats

The Rising Star - Delayed Exchanging

Care in Execution

Starker Case


Starker II



TRA ‘84

45-Day Rule

Method of Identification

180-Day Rule

Pre-existing Exchanges

Holdover Issues after Tax Reform

Format & Structure

“Starker” Trust

Intermediary Format

Acceptance of Notes on Exchangor’s Property

Security for Performance - Use and Control of Cash

Performance Deed of Trust

Third-Party Guarantee or Letter of Credit



Encumbered Property and Immediate Mortgage Relief

Open Transaction Theory

“Sale-in-Lieu” Provision

Delayed (Deferred) Exchange Regulations

Final Regulations

Effective Date

Deferred (Delayed) Exchange Definition

“Reverse-Starker” Transactions

Identification Requirements

Identification & Exchange Periods

Application of §7503

Method of Identification

Property Description

Incidental Property - 15% Rule


Substantial Receipt

Multiple Replacement Properties

Actual & Constructive Receipt Rule

Four Safe Harbors

Safe Harbor #1 - Security

Safe Harbor #2 - Escrow Accounts & Trusts

Disqualified Person

Who Is An Agent?

Safe Harbor #3 - Qualified Intermediary

Who Is A Qualified Intermediary?

Direct Deeding


Simultaneous Exchanges

Safe Harbor #4 - Interest

Interest Reporting - §468B(g)

Restrictions On Rights to Money & Other Property - “g(6)” Limitations

Outside Transfers of Money or Other Property

Delayed Exchange Agreement

Chapter 13 - Warehousing & Pot Method


Reverse Exchanges - R.P. 2000-37

R.P. 2004-51

The Pot Method


Chapter 14 - Accommodators & Intermediaries

Sale & Lease-Back

Appendix A - Calculation Sheets



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