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Determining Cash Given or Received In Tax-Deferred Exchange

The question of how to determine cash given or received in a tax-deferred exchange is a common one. IRS rules are explained below.

The frequently encountered question of how to determine the cash given or received in a Section 1031 real estate exchange is one that does not always have a clear-cut answer. Practitioners inexperienced in Sec. 1031 exchanges may expect to find the answer in the exchange escrow statement; they will be disappointed.

To grasp an understanding of the exchange process, you need understand that what is given is exactly equal to what is received. The transaction is a negotiation between a willing buyer and a willing seller who negotiate the exchange and mutually determine the FMV of the properties exchanged. In other words, an exchange is a balanced transaction.

Another issue is boot, which is the unlike property included in an exchange, which does not qualify as like property. Say you exchange a vacant parcel of land for a residential rental and a car. The car is unlike property, and the car’s value cannot be included in the exchange computation. Cash is also unlike property. However, it is very rare that an exchange includes any unlike property except for cash, which is used to make up the differences in equity in virtually all exchange transactions.

Therefore, for exchanges that do not include boot other than cash, the cash given or received can easily be determined using the worksheet below. If, by some rare chance, unlike property other than cash is involved, its agreed upon value will reduce the cash given or received.

03.20.11 - Ex. A property with an FMV...

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