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The role that debt plays in a exchange is probably one of the most misunderstood areas of 1031 law. Many people (including qualified intermediaries, CPAs, and attorneys) believe that you are required to have debt on your New Property in an amount equal to or greater than the debt that was paid off on your Old Property. This is NOT, In fact, a requirement for a 1031 exchange.

The actual requirement is two fold: you must buy equal or up, and you must reinvest all of the cash. Assume for example that you sell a purple duplex for $100,000 and you buy a replacement property for $90,000. You did not buy equal or up; in fact you bought down. As a result, the $10,000 buy-down is taxable—yes, the entire $10,000 is taxable, and you do not apportion any of the original cost of the duplex to this gain.

Around the end of most years I write a column predicting what you are likely to see in the 1031 arena over the following 12 months. I recently spent an afternoon in a meeting with one of the people responsible for Section 1031 of the tax code for the IRS. Based on that meeting, what follows are my predictions of changes to look for during the next year.

Tightening of the requirements for qualified intermediaries -The IRS knows that they have problems with what they call “Accom-modating Accommodators.” These people are qualified intermediaries (QI) who are pretty loose with the requirements of a 1031 exchange. The problems range from these QIs regularly allowing clients to do 1031 exchanges on fix-and-flips, to their allowing clients to change their identification letter after the 45th day. The IRS knows they are out there, but it is not always easy for them to tell who these intermediaries are.

1031 Exchanges allow you to defer the taxes over capital gains generated on the sale of an old property to be exchanged for a new property. Sooner or later, whoever wishes to make money in the Real Estate market in the United States understands that this is a serious mechanism to consider.

Popular wisdom has many proverbs allusive to the details, in which the part that world investments transactions play can hardly be ignore. Sometimes this transactions looks like angels, sometimes like demons. In the case of Real Estate and in the context of the opportunities that real its boom presents in the South Florida area, thousands or millions of dollars can be spared.

In a real estate market that is moving as fast as Florida's, "flipping" property seems to be the favorite pastime for many people. Flipping is when you buy a property with the intent of selling it very soon after the purchase. But can you do a 1031 exchange and defer the gain in a flip situation?

In order to qualify for a 1031 exchange (which rolls the gain from the sale of the old property to the new), both properties have to be held as an investment or used in a trade or business. Held for investment refers to intent to hold the property for future appreciation. Used in a trade or business means income producing, like rental property. In a flip, you've never rented the property, so it's not income producing. So the question really is, "Did you hold it for investment?"