Section 1031 Exchanges are exceptional tools for deferring taxes on gains and depreciation recapture from the sale of property held for productive use in trade, business or investment purposes. With the right planning and the assistance of Exchange Resource Group (“ERG”) as your Qualified Intermediary (“QI”), you can maximize the benefits of exchanges of property through the 1031 Exchange process.

Because of the exceptional tax advantages allowed for 1031 exchanges, certain

restrictive rules apply and are stringently enforced. One of those rules is the “Equal Or Up” rule. In order to fully defer the capital gains tax from the sale of the Relinquished Property, you must purchase Replacement Property(ies) with a purchase price equal to or greater than the net sales price of the Relinquished Property. The taxpayer must replace both the equity and the debt from the Relinquished Property and all cash received by the QI must be employed in the purchase of the Replacement Property in order to fully defer the capital gains tax.

- For estimating:

Sales Price - Closing Costs = Reinvestment Goal

- For the exact amount:

Net Cash Proceeds + Debt Relief (Loan Payoff) = Reinvestment Goal

There is misconception that when taxpayer doesn't meet this reinvestment goal, it invalidates the 1031 exchange. This is referred to as a partial 1031 Exchange and the taxpayer will defer the tax on the amount that is reinvested and the remaining amount will be subject to tax. If the purchase price of the Replacement Property(ies) is less than the sales price of the Relinquished Property, or if you choose not to use the full amount of the cash from the sale to acquire the Replacement Property, you can still achieve some tax benefit; you just won’t receive the full measure of benefit that you could have.

There is a key difference between a standard sale and a 1031 exchange that is important to understand. In a standard sale, the IRS allows the taxpayer to deduct the basis from the sales price and only pay tax on the difference (the gain). The assumption then is that when a taxpayer decides to complete a 1031 exchange, they only need to reinvest the amount that is the gain. But, in a 1031 exchange, the IRS changes the rules for the taxpayer. The Service states that the first money out (not reinvested) is considered part of the gain, and not the basis, and is therefore taxable.

Scott Rodli, COO

Scott graduated from the University of Montana with a B.A. in Economics. He then went on to attain his JD at the University of Montana School of Law. After spending some time with the Rocky Mountain Elk Foundation, Scott went on to become a 1031 Exchange consultant in Denver for three years. After his stay in Denver, Scott honed his consulting skills by diversifying into the additional business fields of medical device and drug manufacturers in Seattle and in San Diego. After the Great Tohoku Earthquake, and subsequent Tsunami, in Northern Japan, in 2011, Scott volunteered with Samaritan’s Purse, in aiding in the cleanup of the disaster affected areas. Before returning to the US, he decided to spend a year teaching English in Japan as well as continuing his consulting online.



After his time in Japan, the lure of 1031 Exchanges, and a return to home, brought him back to the Rocky Mountains of Denver, to continue his 1031 Exchange career as the Director of Operations for ERG. His hobbies include being an automotive enthusiast (he would especially likes to talk about Nissan Z cars, Porsches and Toyota Landcruisers), hunting, running and fantasy football.