1. Both the Relinquished Property and the Replacement Property must be held either for investment or for productive use in a trade or business.
2. The property must be Like Kind Property. Real property must be 1031 exchanged for real property. Personal property must be 1031 exchanged for personal property.
   
3. There must be an actual reciprocal transfer of properties - a deed for a deed.

Conveyance of Relinquished Property from Exchangor to Buyer

• The escrow company handling the escrow for the Relinquished Property sends the Accommodator, Downstream Exchange Company, Escrow Instructions and the Preliminary Title Report.
• From that information, Downstream prepares a 1031 Exchange Agreement and an Amendment to Escrow Instructions - Exchange of Relinquished Property. These documents are returned to escrow to obtain the signatures of you, the Exchangor, and the Buyer.

Timing and Identification Requirements

• When the Relinquished Property escrow closes, you will receive:
  
  • A letter from Downstream advising you of the date your escrow closed and the amount of funds Downstream received from escrow.
    
  • A calculation of the actual calendar date of the 45th and 180th calendar day from the close of your escrow.  You must identify the property you wish to acquire by the 45th calendar day from the close of your escrow and you must acquire the property you have identified by 180 calendar days of the close of your escrow. 
    
  • A property identification form included with the letter that you must return to Downstream by the 45th calendar day from the close of escrow of your Relinquished Property.
    
• You may identify up to three Replacement Properties. As an alternative, you may identify any number of properties as long as their aggregate fair market value does not exceed 200 percent of the aggregate fair market value of the property you relinquished. As a final option, you may identify any number of properties as long as you acquire at least 95 percent of the aggregate fair market value of all the identified Replacement Properties before the end of the 180 calendar day period.   
• An identification of a property may be revoked in writing any time during the 45 calendar day period.  
• While Downstream is holding your funds, you will receive a monthly analysis advising you of the activity on your account. You will also receive an analysis of the activity in you account if we receive additional funds or make any payments authorized by you the exchangor.  
• A final analysis will be sent to you after the close of escrow of your Replacement Property.

Conveyance of Replacement Property from Seller to Exchanger

• The Replacement Property that you acquire must be property you intend to hold for investment for at least one year. This means that you cannot live in the Replacement Property.  
• At your request, we will send a deposit to the Replacement Property escrow when escrow opens.  
• The escrow company handling the escrow for the Replacement Property sends the Accommodator, Downstream Exchange Company, Escrow Instructions and the Preliminary Title Report.  
• From that information Downstream prepares an Amendment to Escrow Instructions - Exchange of Replacement Property. These documents are returned to escrow to obtain the signatures of you, the Exchangor, and the Seller.  
• Escrow on the Replacement Property must close no later than 180 calendar days after the close of escrow of the Relinquished Property. If a tax return is due during the 180 calendar day period, an extension of time to file the return must be obtained.

Practical Considerations

• You only have 45 calendar days from the close of the sale of the Relinquished Property to identify and 180 calendar days from the close of the sale to acquire a Replacement Property. It may be difficult to find a suitable property within 45 days.  1031 exchanges must be completed within these strict time limitations with absolutely no extensions.  
• As practical matter, you really can identify up to only three Replacement Properties.  If you identify more than three Replacement Properties and the fair market value of the more than three Replacement Properties exceeds 200 percent of the aggregate fair market value of the Relinquished Property, then you have to acquire at least 95 percent of the aggregate fair market value of all the identified Replacement Properties you have identified. 
  
  

Important Issues to Be Taken Into Consideration

• Generally speaking, to completely defer all capital gain taxes:
   
  • You must use all of the net proceeds from your Relinquished Property in the purchase of your Replacement Property.  
  • You must also obtain a mortgage on your Replacement Property equal to, or greater than, the mortgage on your Relinquished Property.  
  • You can offset the amount of mortgage obtained on the Replacement Property by putting the equivalent amount of additional cash into the exchange.  
• Certain losses may affect the amount that is necessary to invest in the Replacement Property. You should consult with your tax preparer regarding your potential Recognized Gain.  
• In a 1031 Exchange, if the property exchanged is to or from a Related Parties, it must be held for two years. Please e-mail, call or FAX us for a further explanation if you feel this may apply to you.  
• It is also important that you do not have actual or "Constructive Receipt" of the funds during the 1031 exchange process. No funds from the transaction should be received by the taxpayer until all Replacement Property has been acquired.  
• You cannot 1031 exchange stock in trade, inventory, property held for sale, stocks, bonds, notes, securities, evidences of indebtedness, certificates of trust or beneficial interest in trust or interest in a partnership.  
• If you 1031 exchange California real property for out-of-state real property, California tax law provides for the non recognition of gain on the 1031 exchange. This allows you to defer the gain into the basis of the real property received. However, if you move out of California and then sell the replacement real property now located outside of California, the portion of the gain attributable to the increase in value of the California real property during the period it was held by you will be income from California sources. This income should be reported as such on a California Form 540 NR.