1. Both the relinquished dental practice (Relinquished Property) and the replacement dental practice (Replacement Property) must be held for productive use in a trade or business.
2. The property must be Like Kind Property. Real property must be exchanged for real property. Personal property must be exchanged for personal property.
3. There must be an actual reciprocal transfer of properties. A bill of sale for a bill of sale.

Conveyance of Relinquished Property from Exchangor to Buyer

• The Broker handling the sale of the relinquished dental practice (Relinquished Property) sends the Accommodator, Downstream Exchange Company, a copy of the practice sales agreement.
• From that information, Downstream prepares a 1031 Exchange Agreement and an Amendment to Practice Sales Agreement-Exchange of Relinquished Dental Practice (Relinquished Property). These documents are returned to the broker to obtain the signatures from you, the Exchangor and the Buyer.

Allocation of Sales Price

• Since only certain assets of a relinquished dental practice Relinquished Property) may be exchanged for certain assets of a replacement dental practice (Replacement Property), you must make an allocation of the sales price of the relinquished dental practice (Relinquished Property).

Timing and Identification Requirements

• When the relinquished dental practice (Relinquished Property) closes, you will receive:
  
  • A letter from Downstream advising you of the date your practice closed and the amount of funds Downstream received from the broker.
  • A calculation of the actual calendar date of the 45th and 180th calendar day from the close of your relinquished dental practice (Relinquished Property). You must identify the replacement dental practice (Replacement Property) you wish to acquire by the 45th calendar day from the close of your relinquished dental practice (Relinquished Property) and you must acquire the replacement dental practice (Replacement Property) you have identified by 180 calendar days of the close of your relinquished dental practice (Relinquished Property).
  • 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 dental practice (Relinquished Property).
    
• You may identify up to three replacement dental practices (Replacement Property). As an alternative, you may identify any number of practices as long as their aggregate fair market value does not exceed 200 percent of the aggregate fair market value of the practice you relinquished. As a final option, you may identify any number of practices as long as you acquire at least 95 percent of the aggregate fair market value of all the identified replacement dental practices (Replacement Property) before the end of the 180 calendar day period.
• An identification of a practice 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.
• A final analysis will be sent to you after the close of escrow of your replacement dental practice (Replacement Property).

Conveyance of Replacement Property from Seller to Exchanger

• The Broker handling the sale of the replacement dental practice (Relinquished Property) sends the Accommodator, Downstream Exchange Company, a copy of the practice sales agreement.
• Downstream then produces the Amendment to Practice Sales Agreement-Conveyance of Replacement Dental Practice (Replacement Property). The documents are sent to the broker handling the purchase practice to obtain the signatures from you, the Exchangor, and the Seller.
• The replacement dental practice (Replacement Property) must close no later than 180 calendar days after the close of close of the relinquished dental practice (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 dental practice (Relinquished Property) to identify and 180 calendar days from the close of the sale to acquire a replacement dental practice (Replacement Property).
• As practical matter, you really can identify up to only three replacement dental practices (Replacement Property). If you identify more than three replacement dental practices (Replacement Property) and the fair market value of the more than three replacement dental practices (Replacement Property) exceeds 200 percent of the aggregate fair market value of the relinquished dental practice (Relinquished Property), then you have to acquire at least 95 percent of the aggregate fair market value of all the identified replacement dental practices (Replacement Property) 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 the sale of real property or from the sale of any tangible personal property of your relinquished dental practice (Relinquished Property) in the purchase of real property or tangible personal property in your replacement dental practice (Replacement Property).
  • You must also obtain debt on your replacement dental practice (Replacement Property) equal to, or greater than, the debt on your relinquished dental practice (Relinquished Property).
  • You can offset the amount of debt obtained on the replacement dental practice (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 dental practice (Replacement Property). You should consult with your tax preparer regarding your potential Recognized Gain.
• In a Like Kind Property Exchange, if the dental practice exchanged is to or from a related party, 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 exchange process. No funds from the transaction should be received by the taxpayer until all the replacement dental practice (Replacement Property) has been acquired.
• You cannot 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 exchange California property for out-of-state property, California tax law provides for the non recognition of gain on the exchange. This allows you to defer the gain into the basis of the property received. However, upon the sale of the replacement property now located outside of California, the portion of the gain attributable to the increase in value of the California 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 if sold by an individual.