The tax deferred exchange, as defined in Section 1031 of the Internal Revenue Code of 1986, as amended, offers businesses one of the last great opportunities to build wealth and save taxes. By completing an exchange, a business ("Exchanger") can dispose of its personal property, use all of the equity to acquire replacement personal property, defer the capital gain tax that would ordinarily be paid, and leverage all of their equity into the replacement property. Two requirements must be met to defer the capital gain tax: (a) the Exchanger must acquire "like-kind" or "like-class" replacement property of equal or greater value, and (b) the Exchanger cannot receive cash or other benefits (unless the Exchanger pays capital gain taxes on this money).

In any exchange the Exchanger must enter into the exchange transaction prior to the close of the sale of the relinquished property. The Exchanger and the Qualified Intermediary enter into an Exchange Agreement, which essentially requires that (a) the Qualified Intermediary acquire the relinquished property from the Exchanger and transfer it to the buyer by the appropriate title document or bill of sale from the Exchanger and (b) the Qualified Intermediary acquire the replacement property from the seller and transfer it to the Exchanger by the appropriate title document or bill of sale from the seller. The cash or other proceeds from the relinquished property are assigned to the Qualified Intermediary and are held by the Qualified Intermediary in a separate, secure account. The exchange funds are used by the Qualified Intermediary to purchase the replacement property for the Exchanger.

Exchanges must be completed within strict time limits. The Exchanger has 45 days from the date the relinquished property closes to "Identify" potential replacement properties. This involves a written notification to the Qualified Intermediary listing an unambiguous description of the potential replacement properties. The purchase of the replacement property must be completed within 180 days after of the close of the relinquished property. After the 45 days has passed, the Exchanger may not change their Property Identification list and must purchase one of the listed replacement properties or the exchange fails.

"Personal property" refers to all property, both tangible and intangible, that is not considered real property. If the sale of such personal property will result in a gain, the taxpayer may want to consider an exchange. Generally speaking, both tangible depreciable personal property, such as cars, trucks and planes and intangible personal property, such as franchise rights, copyrights or broadcast spectrums, are acquired for a certain value known as a tax or cost basis.

For example, if a truck is purchased for $10,000 cash and $30,000 in a loan, the tax basis for the truck is $40,000. The tax basis can be depreciated over time at different rates depending on the type of property and when it was acquired. For example, an automobile is currently considered a five year property under the Modified Accelerated Cost Recovery System (MACRS) of IRC §168, meaning that five years after its acquisition its tax basis will be zero.

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