Certified Exchange Specialist (CES) — Questions and Answers

Question 1: What is a key element of risk management & security protocols?

Ignoring protocols
Unverified access
Risk Management & Security Protocols best practice (Correct answer)
Irrelevant data

Correct answer: Risk Management & Security Protocols best practice

Effective risk management and robust security protocols are essential for protecting assets and data. Following established best practices ensures that potential threats are identified, assessed, and mitigated systematically. This proactive approach helps organizations maintain compliance, prevent breaches, and safeguard sensitive information from various vulnerabilities.

Question 2: How many calendar days does a taxpayer have to identify replacement property after closing on the relinquished property?

180 days
30 days
45 days (Correct answer)
60 days

Correct answer: 45 days

The taxpayer has exactly 45 calendar days from the closing of the relinquished property to identify potential replacement properties.

Question 3: What distinguishes a 'reverse exchange' from a standard delayed 1031 exchange?

In a reverse exchange, no QI is needed
In a reverse exchange, there are no identification or deadline requirements
In a reverse exchange, the exchange is tax-free permanently
In a reverse exchange, the taxpayer acquires the replacement property before selling the relinquished property (Correct answer)

Correct answer: In a reverse exchange, the taxpayer acquires the replacement property before selling the relinquished property

A reverse exchange allows the taxpayer to acquire the replacement property first and then sell the relinquished property, with an EAT parking one of the properties.

Question 4: A taxpayer wants to use a 1031 exchange to consolidate two smaller rental properties into one larger commercial property. Is this permitted?

No, consolidation exchanges require a special IRS ruling
Yes, but only if both properties are in the same state
No, only one-to-one exchanges are allowed
Yes, multiple relinquished properties can be exchanged for one or more replacement properties (Correct answer)

Correct answer: Yes, multiple relinquished properties can be exchanged for one or more replacement properties

A taxpayer can relinquish multiple properties and acquire one or more replacement properties in a single 1031 exchange transaction.

Question 5: Which rule requires immediate reporting of trades?

Real-Time Trade Reporting Rule (Correct answer)
Reporting Delay Act
Price Evaluation Policy
Trade Act of 1992

Correct answer: Real-Time Trade Reporting Rule

The Real-Time Trade Reporting Rule requires that trades in certain securities be reported almost immediately after execution. This rule is crucial for ensuring market transparency by providing up-to-date pricing information to all market participants. It promotes fairness and efficiency by allowing investors to make decisions based on current market data.

Question 6: Under Rev. Proc. 2008-16, a dwelling unit acquired in a 1031 exchange qualifies for personal use conversion if it has been held for at least how long?

12 months
6 months
24 months (Correct answer)
36 months

Correct answer: 24 months

Rev. Proc. 2008-16 provides a safe harbor where a dwelling unit must be held for at least 24 months after the exchange before converting to personal use.

Question 7: To fully defer capital gains tax in a 1031 exchange, the replacement property must have a value that is:

Equal to or greater than the relinquished property (Correct answer)
Within 20% of the relinquished property value
Equal to or less than the relinquished property
At least double the relinquished property value

Correct answer: Equal to or greater than the relinquished property

To fully defer gain, the taxpayer must acquire replacement property of equal or greater value and reinvest all net exchange proceeds.

Question 8: A taxpayer wants to exchange a ranch used for business purposes for an apartment complex held for investment. Is this a valid like-kind exchange?

Yes, because both are US real property held for business or investment (Correct answer)
No, because the properties have different uses
Yes, but only if both properties have the same square footage
No, because ranch land and apartments are different property types

Correct answer: Yes, because both are US real property held for business or investment

Real property exchanged for real property qualifies as like-kind regardless of the specific use, as long as both are held for business or investment.

Question 9: Who is expressly disqualified from serving as a QI under Treasury Regulations?

A licensed title company
An independent exchange company
The taxpayer's attorney who represented them in the last two years (Correct answer)
The taxpayer's real estate agent from a prior transaction more than two years ago

Correct answer: The taxpayer's attorney who represented them in the last two years

Disqualified persons include the taxpayer's employee, attorney, accountant, investment banker, or real estate agent if they served the taxpayer within the two-year period preceding the exchange.

Question 10: What is the consequence of failing to identify replacement property within the 45-day window?

Only a 10% penalty applies to the gain
The entire exchange fails and proceeds become taxable (Correct answer)
The taxpayer can substitute identified property with any real estate
The exchange period is reduced to 90 days

Correct answer: The entire exchange fails and proceeds become taxable

Failure to timely identify replacement property results in a failed exchange, making all deferred gain immediately taxable.

Question 11: What should a taxpayer do if they want to ensure the full 180-day exchange period is available?

Ask the QI to hold funds beyond 180 days
Waive the 45-day identification deadline
Close the relinquished property in January
File for a tax return extension before the exchange period ends (Correct answer)

Correct answer: File for a tax return extension before the exchange period ends

Filing a tax return extension before the exchange period ends ensures the return due date does not shorten the 180-day exchange period.

Question 12: A taxpayer's realized gain is zero (no economic gain), yet the taxpayer receives $30,000 in cash boot. How much gain is recognized?

$15,000, representing 50% of the boot received
$30,000, equal to the boot received
$0, because recognized gain cannot exceed realized gain (Correct answer)
$30,000 less the taxpayer's adjusted basis

Correct answer: $0, because recognized gain cannot exceed realized gain

Recognized gain is limited to the lesser of boot received or realized gain; since realized gain is $0, no gain is recognized even though boot was received.

Question 13: What is the purpose of anti-money laundering (AML) regulations?

To prevent illegal financial transactions (Correct answer)
To manage accounting errors
To enhance investor relations
To simplify audits

Correct answer: To prevent illegal financial transactions

Anti-money laundering (AML) regulations are designed to prevent illegal financial transactions by making it difficult for criminals to disguise illicitly obtained funds as legitimate income. Financial institutions are mandated to implement procedures to detect and report suspicious activities. This helps combat serious financial crimes like terrorism financing and drug trafficking.

Question 14: What is a 'tenant-in-common' (TIC) interest and how can it be used in a 1031 exchange?

A TIC interest is an undivided fractional interest in real property that qualifies as like-kind replacement property (Correct answer)
A TIC interest represents sole ownership — it cannot be used in a 1031 exchange
TIC interests can only be used in improvement exchanges
A TIC interest is a debt instrument secured by real property

Correct answer: A TIC interest is an undivided fractional interest in real property that qualifies as like-kind replacement property

A tenant-in-common interest is an undivided fractional ownership in real property and qualifies as like-kind replacement property in a 1031 exchange.

Question 15: What is a Delaware Statutory Trust (DST) and why is it used as replacement property in 1031 exchanges?

A DST is a short-term government trust used for parking exchange funds
A DST is a legal entity that replaces the QI in complex exchanges
A DST is a trust structure that holds real property and issues beneficial interests that qualify as like-kind replacement property (Correct answer)
A DST is a mutual fund that invests in real estate investment trusts

Correct answer: A DST is a trust structure that holds real property and issues beneficial interests that qualify as like-kind replacement property

A DST holds real property and issues beneficial interests to investors; under IRS Rev. Rul. 2004-86, these interests qualify as like-kind replacement property.

Question 16: Which statement about personal property and 1031 exchanges after the Tax Cuts and Jobs Act of 2017 is correct?

Only vehicles qualify as personal property in 1031 exchanges
Personal property exchanges require IRS pre-approval
Personal property still qualifies for 1031 exchanges
Personal property was eliminated from 1031 exchange eligibility (Correct answer)

Correct answer: Personal property was eliminated from 1031 exchange eligibility

The TCJA eliminated personal property from 1031 exchange eligibility, limiting it to real property only.

Question 17: How does a 1031 exchange affect state income tax in states that do not conform to federal 1031 rules?

The taxpayer may owe state capital gains tax even if federal gain is deferred (Correct answer)
States must follow federal law on 1031 exchanges
State taxes are waived for exchanges completed within the state
State taxes are always automatically deferred in a 1031 exchange

Correct answer: The taxpayer may owe state capital gains tax even if federal gain is deferred

Some states do not conform to federal 1031 exchange rules, meaning state capital gains tax may be due even when the federal gain is fully deferred.

Question 18: In a 1031 exchange involving a multi-asset property (e.g., a motel with furniture), how are the personal property components treated after the TCJA?

Personal property components are excluded from 1031 exchange treatment and may be taxable (Correct answer)
The full motel value qualifies for 1031 exchange treatment
The IRS allows a 10% personal property exception
Personal property components receive a 5-year deferral period

Correct answer: Personal property components are excluded from 1031 exchange treatment and may be taxable

After TCJA, personal property (furniture, fixtures, equipment) within a multi-asset property no longer qualifies for 1031 exchange treatment and may trigger taxable gain.

Question 19: Can a taxpayer revoke or change a replacement property identification after the 45-day period has passed?

Yes, if an IRS form is filed within 10 days
Yes, if the QI provides written approval
Yes, changes are allowed up to the 90th day
No, identifications cannot be changed after the 45-day deadline (Correct answer)

Correct answer: No, identifications cannot be changed after the 45-day deadline

Once the 45-day identification period has expired, the taxpayer cannot change or revoke the identification.

Question 20: How many calendar days does a taxpayer have to close on replacement property after transferring the relinquished property?

90 days
180 days (Correct answer)
365 days
45 days

Correct answer: 180 days

The exchange period is 180 calendar days from the date of transfer of the relinquished property.

Question 21: What is a 'parking arrangement' in the context of a reverse or improvement exchange?

The taxpayer parks the proceeds in a retirement account
The replacement property is listed for sale while exchange proceeds are held
The EAT temporarily holds title to one of the properties to facilitate the exchange (Correct answer)
The QI parks exchange funds in a money market account

Correct answer: The EAT temporarily holds title to one of the properties to facilitate the exchange

A parking arrangement refers to the EAT taking temporary title to either the replacement or relinquished property to allow the exchange structure to work.

Question 22: A taxpayer has taken $100,000 in depreciation on the relinquished property. How does this affect the adjusted basis?

Adjusted basis increases by $100,000
Adjusted basis decreases by $100,000 (Correct answer)
Depreciation is added back only at sale
Adjusted basis is unaffected by depreciation

Correct answer: Adjusted basis decreases by $100,000

Accumulated depreciation reduces the adjusted basis, which in turn increases the realized gain when the property is sold.

Question 23: The QI's exchange agreement must be in place before what event to properly structure the exchange?

Before the taxpayer signs the listing agreement for the relinquished property
Before the taxpayer closes on the relinquished property (Correct answer)
Before the end of the tax year
Before the replacement property is identified

Correct answer: Before the taxpayer closes on the relinquished property

The exchange agreement must be executed before the closing of the relinquished property to prevent constructive receipt of the proceeds.

Question 24: What is the consequence if the taxpayer does not close on any identified replacement property within the 180-day exchange period?

The QI holds the funds for an additional 45 days
The taxpayer may apply the funds to a future exchange
A 5% penalty is assessed but gain deferral continues
The exchange fails and the proceeds are returned to the taxpayer as taxable income (Correct answer)

Correct answer: The exchange fails and the proceeds are returned to the taxpayer as taxable income

Failure to close on replacement property within 180 days results in a failed exchange and the proceeds are treated as taxable.

Question 25: What is a key purpose of regulatory compliance in securities exchange?

To eliminate public companies
To stop mergers
To protect investors and promote transparency (Correct answer)
To lower tax rates

Correct answer: To protect investors and promote transparency

A key purpose of regulatory compliance in securities exchange is to protect investors and promote transparency. Regulations ensure that all market participants adhere to fair practices and disclose relevant information, preventing fraud and manipulation. This fosters investor confidence and maintains the integrity of the financial markets.

Question 26: Which identification rule allows a taxpayer to identify any number of replacement properties as long as their combined fair market value does not exceed 200% of the relinquished property's FMV?

200% rule (Correct answer)
Three-property rule
Unlimited property rule
95% rule

Correct answer: 200% rule

The 200% rule allows identification of any number of properties as long as their aggregate FMV does not exceed 200% of the relinquished property's FMV.

Question 27: What is a key element of client communication?

Unverified access
Irrelevant data
Ignoring protocols
Client Communication best practice (Correct answer)

Correct answer: Client Communication best practice

Effective client communication is vital for building trust, managing expectations, and ensuring client satisfaction. Adhering to best practices, such as clarity, transparency, responsiveness, and active listening, fosters strong relationships. These practices help prevent misunderstandings, resolve issues efficiently, and maintain a positive professional image.

Question 28: A CES professional is advising a client who wishes to exchange out of active rental property into a DST. What key risk should they disclose about DST investments?

DSTs are illiquid, passive investments with no ability for the investor to manage or refinance the property (Correct answer)
DST income is taxed at ordinary income rates regardless of property type
DSTs require a minimum 10-year holding period
DST interests do not qualify as like-kind replacement property

Correct answer: DSTs are illiquid, passive investments with no ability for the investor to manage or refinance the property

DST investments are highly illiquid and passive — investors have no management control, and refinancing or selling the property requires unanimous consent.

Question 29: Which of the following would NOT constitute boot in a 1031 exchange?

Net mortgage relief of $50,000 from reduced debt on replacement property
$10,000 in cash disbursed to the taxpayer at closing
Personal property worth $5,000 received from the buyer
An additional parcel of qualifying like-kind real estate received from the buyer (Correct answer)

Correct answer: An additional parcel of qualifying like-kind real estate received from the buyer

Like-kind real property received as part of the exchange is not boot; it qualifies for full tax deferral alongside the primary replacement property.

Question 30: A taxpayer relinquishes a duplex held for rental income and wishes to acquire a single-family home as a rental. Is this a valid like-kind exchange?

Yes, but only if values are identical
No, because duplexes and single-family homes have different uses
Yes, because both are real property held for investment (Correct answer)
No, because the property types are too different

Correct answer: Yes, because both are real property held for investment

Both a duplex and a single-family rental home are real property held for investment, making them like-kind.

Question 31: Which IRS Revenue Procedure provides the safe harbor guidelines for reverse and improvement exchanges?

Rev. Proc. 2010-14
Rev. Proc. 2017-51
Rev. Proc. 2000-37 (Correct answer)
Rev. Proc. 1990-12

Correct answer: Rev. Proc. 2000-37

Rev. Proc. 2000-37 provides the IRS safe harbor for reverse and improvement exchanges using Exchange Accommodation Titleholders.

Question 32: Which agency primarily enforces exchange rules in the U.S.?

FDA
FBI
SEC (Correct answer)
IRS

Correct answer: SEC

The Securities and Exchange Commission (SEC) is the primary federal agency responsible for enforcing exchange rules in the U.S. Its mission is to protect investors, maintain fair and orderly markets, and facilitate capital formation. The SEC achieves this by enforcing federal securities laws and regulating market participants.

Question 33: Which document outlines company operations and compliance requirements?

Invoice
Prospectus (Correct answer)
Memo
Balance sheet

Correct answer: Prospectus

A prospectus is a formal legal document that provides comprehensive details about a company's operations, financial condition, and the securities being offered to potential investors. It outlines compliance requirements and risks, enabling investors to make informed decisions. This document is crucial for transparency in public offerings.

Question 34: The adjusted basis of replacement property in a completed 1031 exchange is generally calculated as:

The FMV of replacement property minus the deferred (unrecognized) gain (Correct answer)
The original cost of the relinquished property plus improvements
The net sale price of the relinquished property minus exchange costs
The fair market value of the replacement property at acquisition

Correct answer: The FMV of replacement property minus the deferred (unrecognized) gain

The replacement property's basis equals its FMV minus the still-deferred gain, which effectively carries the built-in gain forward into the new property.

Question 35: What is a key element of client communication?

Irrelevant data
Client Communication best practice (Correct answer)
Unverified access
Ignoring protocols

Correct answer: Client Communication best practice

Question 36: What is the QI's responsibility when it receives the relinquished property proceeds at closing?

Hold the funds in a secure account and use them solely to acquire the replacement property (Correct answer)
Invest the funds in short-term securities to generate interest
Transfer the funds back to the taxpayer for safekeeping
Hold the funds until the IRS confirms the exchange

Correct answer: Hold the funds in a secure account and use them solely to acquire the replacement property

The QI must hold the exchange proceeds and use them exclusively for acquiring the replacement property as directed by the exchange agreement.

Question 37: Which of the following would disqualify a property from a 1031 exchange because it is 'held primarily for sale'?

Farmland rented to agricultural operators
A storage facility held for five years
A house flipped by a dealer after 90 days (Correct answer)
A commercial warehouse leased to tenants

Correct answer: A house flipped by a dealer after 90 days

Property held primarily for sale, such as dealer property that is quickly flipped, does not qualify for 1031 exchange treatment.

Question 38: What is the significance of the 'safe harbor' provisions in the Treasury Regulations for QIs?

They permit the QI to invest exchange funds in equities
They eliminate the need for a written exchange agreement
They allow the QI to take title to exchange properties without tax consequence
They allow the taxpayer to use a QI without triggering constructive receipt, as long as specific conditions are met (Correct answer)

Correct answer: They allow the taxpayer to use a QI without triggering constructive receipt, as long as specific conditions are met

The safe harbor provisions under Treas. Reg. §1.1031(k)-1 establish conditions under which using a QI does not result in constructive receipt by the taxpayer.

Question 39: Which of the following best describes the 'net boot' concept used in gain recognition calculations?

Mortgage assumed on replacement property minus mortgage relieved on relinquished property
Boot received minus allowable exchange expenses and any boot paid by the taxpayer (Correct answer)
Cash received plus personal property received, without reduction for any costs
Total FMV of all property received minus total FMV of all property relinquished

Correct answer: Boot received minus allowable exchange expenses and any boot paid by the taxpayer

Net boot is computed by reducing gross boot received by exchange expenses paid and any boot the taxpayer contributes, yielding the net amount subject to gain recognition.

Question 40: Under the boot netting rules, which of the following can directly offset mortgage boot?

Cash received by the taxpayer from the qualified intermediary
The qualified intermediary's escrow fee
Depreciation allowed on replacement property after acquisition
Cash added by the taxpayer into the exchange (Correct answer)

Correct answer: Cash added by the taxpayer into the exchange

Cash contributed by the taxpayer to complete the exchange directly offsets mortgage boot, reducing net boot and the amount of gain recognized.

Question 41: In a 1031 exchange, the term 'boot' refers to:

The qualified intermediary's fee for facilitating the exchange
Excess equity carried forward into the replacement property
Additional like-kind real property received beyond the relinquished property
Non-like-kind property, cash, or net debt relief received in the exchange (Correct answer)

Correct answer: Non-like-kind property, cash, or net debt relief received in the exchange

Boot is any non-like-kind property, cash, or net debt relief received by the taxpayer, and its receipt triggers gain recognition.

Question 42: Which of the following is a key due diligence step an exchanger should take when selecting a QI?

Confirm the QI offers the lowest fee in the market
Ensure the QI is a licensed real estate broker
Verify the QI carries fidelity bond and errors & omissions insurance (Correct answer)
Confirm the QI is a subsidiary of a national bank

Correct answer: Verify the QI carries fidelity bond and errors & omissions insurance

A prudent exchanger should verify that the QI carries fidelity bond coverage and E&O insurance to protect against fraud or errors.

Question 43: In a 1031 exchange, what does 'boot' refer to?

The fair market value of the relinquished property
The qualified intermediary's fee
Any unlike property or cash received in the exchange (Correct answer)
The down payment on the replacement property

Correct answer: Any unlike property or cash received in the exchange

Boot is any unlike property or cash received in the exchange, which is taxable to the extent of gain.

Question 44: How long does the IRS allow for a reverse exchange safe harbor period under Rev. Proc. 2000-37?

180 days (Correct answer)
90 days
45 days
365 days

Correct answer: 180 days

Under Rev. Proc. 2000-37, the safe harbor for reverse exchanges requires the EAT to transfer the parked property within 180 days.

Question 45: When does the IRS look at whether property was 'held for productive use in trade or business or for investment'?

Only when the replacement property is sold
Only at the time the exchange is initiated
Only when the taxpayer files a 1031 election with the IRS
At both the time of relinquishment and at the time of acquisition of the replacement property (Correct answer)

Correct answer: At both the time of relinquishment and at the time of acquisition of the replacement property

Both the relinquished and replacement properties must be held for qualifying purposes at the time of each respective transfer.

Question 46: A taxpayer can eliminate mortgage boot arising from reduced debt on replacement property by:

Paying down the relinquished property's mortgage before listing the property
Adding cash to the exchange or acquiring replacement property with equal or greater debt (Correct answer)
Requesting a waiver from the IRS by filing Form 8824 with an explanation
Splitting the transaction into two separate like-kind exchanges

Correct answer: Adding cash to the exchange or acquiring replacement property with equal or greater debt

Mortgage boot is neutralized when the taxpayer either contributes additional cash to the exchange or assumes debt on replacement property equal to or exceeding the debt relieved.

Question 47: What is a key element of risk management & security protocols?

Unverified access
Ignoring protocols
Risk Management & Security Protocols best practice (Correct answer)
Irrelevant data

Correct answer: Risk Management & Security Protocols best practice

Question 48: Which of the following best describes an 'installment sale' combined with a 1031 exchange?

A 1031 exchange can defer gain on proceeds received at closing, while installment payments received later may be partially taxable (Correct answer)
An installment sale always disqualifies a 1031 exchange
An installment sale and 1031 exchange cannot be used in the same transaction
An installment sale eliminates the need for a QI

Correct answer: A 1031 exchange can defer gain on proceeds received at closing, while installment payments received later may be partially taxable

Exchange proceeds received at closing are deferred via the 1031 exchange, but subsequent installment payments received from the buyer may be subject to tax as they are received.

Question 49: Why is it critical for the QI to be identified and engaged BEFORE the relinquished property is listed for sale?

To allow the QI to negotiate the sale price
To ensure the exchange agreement is in place before any binding obligation to transfer arises (Correct answer)
To establish the replacement property identification before listing
To avoid paying capital gains on the listing period

Correct answer: To ensure the exchange agreement is in place before any binding obligation to transfer arises

The exchange agreement and assignment must be structured before the taxpayer enters a binding obligation to sell — ideally before or at listing.

Question 50: In a 1031 exchange in which no boot is received and the taxpayer fully reinvests all proceeds into qualifying replacement property, the result is:

Full deferral of all realized gain with no gain recognized in the current year (Correct answer)
Recognition of 50% of the realized gain as long-term capital gain
Recognition of only the depreciation recapture portion of the realized gain
Immediate recognition of the full realized gain in the current tax year

Correct answer: Full deferral of all realized gain with no gain recognized in the current year

When no boot is received and all exchange proceeds are reinvested into qualifying like-kind replacement property, the entire realized gain is deferred and no gain is recognized in the current tax year.

Question 51: Which of the following costs are treated as exchange expenses that reduce boot and taxable gain?

Depreciation previously taken on the relinquished property
Tenant security deposits held in escrow
Selling commissions and transactional closing costs paid at settlement (Correct answer)
Mortgage principal payments made before closing

Correct answer: Selling commissions and transactional closing costs paid at settlement

Selling commissions, title insurance, escrow fees, and other closing costs directly associated with the exchange reduce the amount realized and offset boot.

Question 52: What is a key element of risk management & security protocols?

Ignoring protocols
Unverified access
Irrelevant data
Risk Management & Security Protocols best practice (Correct answer)

Correct answer: Risk Management & Security Protocols best practice

Question 53: Which IRS form is used by a taxpayer to report a like-kind exchange?

Form 4797
Schedule D
Form 1099-S
Form 8824 (Correct answer)

Correct answer: Form 8824

Form 8824 (Like-Kind Exchanges) is filed with the taxpayer's return to report a 1031 exchange.

Question 54: What is 'realized gain' in the context of a 1031 exchange?

The fair market value of the replacement property
The capital gain tax owed on the transaction
The amount of depreciation taken on the relinquished property
The difference between the amount realized on the sale and the adjusted basis of the relinquished property (Correct answer)

Correct answer: The difference between the amount realized on the sale and the adjusted basis of the relinquished property

Realized gain is computed as the amount realized minus the adjusted basis of the relinquished property.

Question 55: What is the primary long-term estate planning advantage of a 1031 exchange strategy?

It converts ordinary income into capital gain income
It doubles the taxpayer's depreciation deductions
It guarantees elimination of all estate taxes
It allows accumulated deferred gains to be permanently wiped out via the stepped-up basis at death (Correct answer)

Correct answer: It allows accumulated deferred gains to be permanently wiped out via the stepped-up basis at death

The long-term estate planning power of 1031 exchanges lies in the ability to build wealth tax-deferred and ultimately receive a step-up in basis at death, permanently eliminating the deferred gain.

Question 56: In a fully qualifying 1031 exchange, depreciation recapture under IRC §1250 is:

Deferred along with the capital gain into the replacement property's basis (Correct answer)
Permanently eliminated by the exchange transaction
Only deferred on residential rental property, not commercial property
Immediately recognized as ordinary income at the time of the exchange

Correct answer: Deferred along with the capital gain into the replacement property's basis

A valid 1031 exchange defers both the capital gain and the §1250 depreciation recapture; the unrecognized gain and recapture carry into the replacement property's lower basis.

Question 57: The 95% rule allows a taxpayer to identify any number of properties, but requires that:

95% of exchange funds be reinvested within 45 days
At least 95% of the identified properties be acquired (Correct answer)
The QI hold at least 95% of the exchange proceeds
The replacement properties have a combined FMV of at least 95% of the relinquished property

Correct answer: At least 95% of the identified properties be acquired

Under the 95% rule, a taxpayer may identify any number of properties but must actually receive 95% or more of the aggregate FMV of all identified properties.

Question 58: What is a '1031 exchange accommodation titleholder agreement' (QEAA) and when is it required?

A QEAA is the written agreement between the taxpayer and EAT required for reverse and improvement exchange safe harbors (Correct answer)
A QEAA is required for all delayed exchanges over $500,000
A QEAA is the exchange agreement between the taxpayer and the QI
A QEAA is an IRS pre-clearance form for complex exchanges

Correct answer: A QEAA is the written agreement between the taxpayer and EAT required for reverse and improvement exchange safe harbors

Under Rev. Proc. 2000-37, a QEAA is the written agreement establishing the EAT arrangement in reverse and improvement exchanges.

Question 59: What is an 'umbrella partnership REIT' (UPREIT) and how does it relate to 1031 exchanges?

An UPREIT allows property owners to contribute property in exchange for operating partnership units, which is an alternative to a 1031 exchange (Correct answer)
An UPREIT is a Delaware Statutory Trust that qualifies as replacement property
An UPREIT is a government-approved exchange structure for commercial properties only
An UPREIT is a type of QI used for large institutional exchanges

Correct answer: An UPREIT allows property owners to contribute property in exchange for operating partnership units, which is an alternative to a 1031 exchange

An UPREIT allows property owners to contribute property to a REIT's operating partnership in exchange for OP units — while not a 1031 exchange itself, it is a related tax-deferral strategy.

Question 60: A taxpayer has an adjusted basis of $200,000 in the relinquished property and sells it for $500,000. What is the realized gain?

$700,000
$300,000 (Correct answer)
$500,000
$200,000

Correct answer: $300,000

Realized gain = $500,000 (amount realized) − $200,000 (adjusted basis) = $300,000.

Question 61: What is a key element of risk management & security protocols?

Ignoring protocols
Unverified access
Risk Management & Security Protocols best practice (Correct answer)
Irrelevant data

Correct answer: Risk Management & Security Protocols best practice

Question 62: What is a key element of transaction processing?

Irrelevant data
Unverified access
Ignoring protocols
Transaction Processing best practice (Correct answer)

Correct answer: Transaction Processing best practice

A key element of transaction processing is adhering to best practices to ensure accuracy, security, and efficiency. This includes robust data validation, comprehensive error handling, and maintaining clear audit trails. Following these practices is crucial for preserving data integrity, meeting regulatory compliance, and building trust in financial systems.

Question 63: What is the net investment income tax (NIIT) rate that may apply to gain recognized in a failed 1031 exchange for high-income taxpayers?

3.8% (Correct answer)
5.0%
0.9%
2.9%

Correct answer: 3.8%

The NIIT is 3.8% and may apply to net investment income, including gain from the sale of investment property, for taxpayers above the income threshold.

Question 64: What is a key element of risk management & security protocols?

Ignoring protocols
Unverified access
Risk Management & Security Protocols best practice (Correct answer)
Irrelevant data

Correct answer: Risk Management & Security Protocols best practice

Question 65: What is a key element of transaction processing?

Transaction Processing best practice (Correct answer)
Ignoring protocols
Irrelevant data
Unverified access

Correct answer: Transaction Processing best practice

Question 66: A taxpayer has a realized gain of $300,000 on the sale of investment property. They complete a 1031 exchange for a property of equal value. What is the recognized gain?

$75,000
$150,000
$0 (Correct answer)
$300,000

Correct answer: $0

In a fully qualifying 1031 exchange with no boot received, the recognized gain is zero — the entire $300,000 is deferred.

Question 67: What is the primary tax benefit of completing a successful 1031 exchange?

Permanent elimination of capital gains tax
Reduction of property tax on the replacement property
Elimination of depreciation recapture on all future sales
Deferral of capital gains tax on the sale of investment property (Correct answer)

Correct answer: Deferral of capital gains tax on the sale of investment property

A 1031 exchange defers — but does not eliminate — capital gains tax, allowing the taxpayer to reinvest the full proceeds.

Question 68: What is a key element of transaction processing?

Unverified access
Transaction Processing best practice (Correct answer)
Irrelevant data
Ignoring protocols

Correct answer: Transaction Processing best practice

Question 69: A taxpayer wants to use exchange proceeds to purchase a vacation home that they will occasionally use personally. Is this a qualifying replacement property?

No, vacation homes are permanently excluded from 1031 exchanges
Yes, if the property is rented for at least 60 days per year
Yes, any real property qualifies
No, property used personally does not qualify unless it meets the investment use test (Correct answer)

Correct answer: No, property used personally does not qualify unless it meets the investment use test

A vacation home must meet specific requirements (held for investment, rented at fair market value, limited personal use) to qualify — personal use alone disqualifies it.

Question 70: What is a key element of client communication?

Client Communication best practice (Correct answer)
Irrelevant data
Unverified access
Ignoring protocols

Correct answer: Client Communication best practice

Question 71: What is a key element of risk management & security protocols?

Ignoring protocols
Risk Management & Security Protocols best practice (Correct answer)
Unverified access
Irrelevant data

Correct answer: Risk Management & Security Protocols best practice

Question 72: What impact does a 1031 exchange have on the taxpayer's future depreciation deductions?

Depreciation is suspended during the exchange period
Depreciation continues based on the carryover adjusted basis, which is lower than fair market value (Correct answer)
Depreciation restarts fresh at the replacement property's full purchase price
Depreciation is eliminated on the replacement property for 5 years

Correct answer: Depreciation continues based on the carryover adjusted basis, which is lower than fair market value

Because the basis carries over (substituted basis), the depreciation deductions on the replacement property are based on a lower adjusted basis than the current fair market value.

Question 73: Which tax rate applies to unrecaptured Section 1250 depreciation when it becomes taxable?

15%
37%
25% (Correct answer)
0%

Correct answer: 25%

Unrecaptured Section 1250 depreciation is taxed at a maximum rate of 25% when recognized.

Question 74: A taxpayer's realized gain on the relinquished property is correctly calculated as:

Boot received minus qualifying exchange expenses
Net equity in replacement property minus net equity in relinquished property
Amount realized (sale price less selling costs) minus the adjusted basis of relinquished property (Correct answer)
Replacement property FMV minus relinquished property FMV

Correct answer: Amount realized (sale price less selling costs) minus the adjusted basis of relinquished property

Realized gain equals the amount realized (gross proceeds minus selling costs) less the adjusted basis of the property given up, following standard gain computation rules.

Question 75: How does the recognition of gain on boot received affect the basis of the replacement property?

The basis is adjusted upward by the amount of gain recognized on the boot, reducing deferred gain (Correct answer)
The basis equals the FMV of replacement property only when boot is received
The basis is entirely unaffected by the receipt of boot
The basis increases by the full amount of boot received regardless of gain recognition

Correct answer: The basis is adjusted upward by the amount of gain recognized on the boot, reducing deferred gain

Gain recognized on boot reduces the amount of deferred gain, so the replacement property's basis is stepped up by the recognized gain, partially restoring basis.

Question 76: What should a CES professional advise a client who discovers their QI is using exchange funds for the QI's own business operations?

Immediately consult legal counsel, as this constitutes misuse of client funds and may jeopardize the exchange (Correct answer)
Continue the exchange since the QI will return the funds at closing
Ask the QI to provide a promissory note for the funds
File Form 8824 early to protect the exchange

Correct answer: Immediately consult legal counsel, as this constitutes misuse of client funds and may jeopardize the exchange

Commingling or misuse of exchange funds by a QI is a serious breach and potential fraud — the client must seek immediate legal counsel.

Question 77: When does the 45-day identification period begin?

On the date the exchange agreement is signed with the QI
On the date the relinquished property is transferred to the buyer (Correct answer)
On the date the taxpayer receives the QI's wire
On the date the purchase agreement for replacement property is signed

Correct answer: On the date the relinquished property is transferred to the buyer

The 45-day identification period begins on the date of the actual transfer (closing) of the relinquished property.

Question 78: A taxpayer sells unencumbered property for $600,000 (adjusted basis $200,000) and acquires replacement property worth $600,000 by assuming a $200,000 mortgage and using $400,000 in exchange funds. What is the recognized gain?

$600,000, equal to the total sale price
$0, because full value was reinvested with no cash back (Correct answer)
$400,000, equal to the cash portion of the transaction
$200,000, equal to the mortgage assumed

Correct answer: $0, because full value was reinvested with no cash back

All $600,000 in proceeds were fully reinvested (via $400,000 exchange funds plus $200,000 in assumed debt), no boot was received, and therefore no gain is recognized.

Question 79: Under IRC Section 1031, what happens to the taxpayer's basis in the replacement property?

It is set to the fair market value of the replacement property
It carries over from the relinquished property (substituted basis) (Correct answer)
It is set to the replacement property's purchase price minus depreciation
It is reset to zero

Correct answer: It carries over from the relinquished property (substituted basis)

The taxpayer's basis in the replacement property is the substituted basis — generally the adjusted basis of the relinquished property carried forward.

Question 80: What is a key element of risk management & security protocols?

Ignoring protocols
Irrelevant data
Risk Management & Security Protocols best practice (Correct answer)
Unverified access

Correct answer: Risk Management & Security Protocols best practice

Question 81: In a simultaneous exchange, how does the QI coordinate the transfer of funds and deeds?

The QI coordinates closing so that the relinquished and replacement property transfers happen on the same day (Correct answer)
The QI transfers funds only after both deeds are recorded
The QI holds both properties for 45 days before transferring
The QI acquires title to both properties before transferring them

Correct answer: The QI coordinates closing so that the relinquished and replacement property transfers happen on the same day

In a simultaneous exchange, the QI coordinates closings so both the relinquished and replacement properties transfer on the same day.

Question 82: What is 'constructive receipt' in the context of a 1031 exchange?

The physical receipt of the deed to the replacement property
When the taxpayer has control over or the ability to access the exchange proceeds (Correct answer)
The transfer of title at closing of the relinquished property
When the QI delivers wire proceeds to the closing agent

Correct answer: When the taxpayer has control over or the ability to access the exchange proceeds

Constructive receipt occurs when the taxpayer has the ability to control, pledge, or demand the exchange funds, which would disqualify the exchange.

Question 83: Which of the following is NOT eligible as like-kind property in a 1031 exchange?

A commercial office building
A vacant lot held for investment
Rental residential property
A primary residence (Correct answer)

Correct answer: A primary residence

A primary residence is not held for business or investment purposes and does not qualify for a 1031 exchange.

Question 84: What is a key element of client communication?

Irrelevant data
Unverified access
Ignoring protocols
Client Communication best practice (Correct answer)

Correct answer: Client Communication best practice

Question 85: If a taxpayer closes on the relinquished property on March 1, what is the last day to identify replacement property?

April 30
April 14
April 15 (Correct answer)
March 31

Correct answer: April 15

Counting 45 calendar days from March 1, the identification deadline falls on April 15.

Question 86: Can US real property be exchanged for foreign real property in a 1031 exchange?

Yes, if both properties are investment properties
Yes, as long as the exchange value is equal
No, US real property and foreign real property are not like-kind (Correct answer)
No, only commercial properties qualify

Correct answer: No, US real property and foreign real property are not like-kind

Since the Tax Cuts and Jobs Act of 2017, US real property and foreign real property are not considered like-kind.

Question 87: What document does the QI use to acquire the rights to the relinquished property without taking title?

An assignment agreement (Correct answer)
A purchase option agreement
A trust deed
A deed of reconveyance

Correct answer: An assignment agreement

The QI uses an assignment of the taxpayer's rights under the sale contract to step into the exchange without taking title to the property.

Question 88: Which type of exchange involves two parties directly trading properties with each other?

Delayed exchange
Simultaneous exchange
Improvement exchange
Two-party direct exchange (Correct answer)

Correct answer: Two-party direct exchange

A two-party direct exchange (also called a swap) involves two taxpayers directly exchanging their properties with each other.

Question 89: What is a key element of transaction processing?

Unverified access
Irrelevant data
Ignoring protocols
Transaction Processing best practice (Correct answer)

Correct answer: Transaction Processing best practice

Question 90: What is the primary distinguishing factor between investment property and dealer property for 1031 exchange purposes?

Whether the property is financed or owned free and clear
The dollar value of the property
The intent of the taxpayer at the time of purchase and sale (Correct answer)
The number of years the property was owned

Correct answer: The intent of the taxpayer at the time of purchase and sale

The taxpayer's intent — whether the property is held for investment or for sale — is the primary factor distinguishing qualifying from disqualifying property.

Question 91: What is an 'improvement exchange' (also called a build-to-suit or construction exchange)?

An exchange where the taxpayer builds a new property on relinquished land
An exchange where improvements are made to the relinquished property before sale
An exchange where the replacement property is improved using exchange funds held by the EAT before being transferred to the taxpayer (Correct answer)
An exchange structure that allows exchange of raw land only

Correct answer: An exchange where the replacement property is improved using exchange funds held by the EAT before being transferred to the taxpayer

In an improvement exchange, the EAT holds the replacement property while improvements are made using exchange proceeds, then transfers the improved property to the taxpayer within 180 days.

Question 92: What is a key element of transaction processing?

Transaction Processing best practice (Correct answer)
Ignoring protocols
Unverified access
Irrelevant data

Correct answer: Transaction Processing best practice

Question 93: What is a key element of client communication?

Ignoring protocols
Unverified access
Irrelevant data
Client Communication best practice (Correct answer)

Correct answer: Client Communication best practice

Question 94: Which of the following property types qualifies as like-kind in a 1031 exchange?

A leasehold interest of 30 or more years (Correct answer)
Stock in a real estate company
Inventory held by a dealer
A primary residence upgraded for resale

Correct answer: A leasehold interest of 30 or more years

A leasehold interest with 30 or more years remaining (including renewal options) is considered like-kind to a fee simple interest.

Question 95: In a reverse exchange, which property does the Exchange Accommodation Titleholder (EAT) hold?

The taxpayer's personal property as collateral
Either the relinquished or replacement property, depending on the structure (Correct answer)
The relinquished property only
The QI's escrow account

Correct answer: Either the relinquished or replacement property, depending on the structure

In a reverse exchange, the EAT can hold either the replacement property (park-and-sell) or the relinquished property (buy-first), depending on which structure is used.

Question 96: What is an 'exchange-first' strategy in a 1031 exchange involving a partial 1031 and partial installment sale?

The taxpayer takes installment payments first, then uses the 1031 exchange for remaining proceeds
The taxpayer exchanges the installment note for like-kind property
The QI receives installment payments on behalf of the taxpayer
The taxpayer completes the 1031 exchange before receiving any installment payments (Correct answer)

Correct answer: The taxpayer completes the 1031 exchange before receiving any installment payments

In an exchange-first strategy, all proceeds possible are directed into the 1031 exchange, with the installment note handled separately to manage taxable portions.

Question 97: Which of the following would create 'mortgage boot' in a 1031 exchange?

Acquiring a replacement property with a higher mortgage than the relinquished property
Acquiring a replacement property with a lower mortgage than the relinquished property (Correct answer)
Paying off the mortgage before the exchange
Using all-cash to acquire the replacement property

Correct answer: Acquiring a replacement property with a lower mortgage than the relinquished property

If the taxpayer takes on less debt on the replacement property than existed on the relinquished property, the net debt relief is treated as mortgage boot.

Question 98: Under the three-property rule, how many potential replacement properties may a taxpayer identify?

Up to two properties
Up to five properties of equal value
An unlimited number if values are disclosed
Up to three properties regardless of value (Correct answer)

Correct answer: Up to three properties regardless of value

The three-property rule allows identification of up to three replacement properties regardless of their combined fair market value.

Question 99: Which of the following is considered 'exchange expenses' that reduce boot in a 1031 exchange?

Qualified intermediary fees (Correct answer)
Hazard insurance premiums
Loan origination fees
Property management fees

Correct answer: Qualified intermediary fees

Qualified intermediary fees are exchange expenses that can reduce the amount of taxable boot received.

Question 100: Under IRC Section 1031, which of the following best defines 'like-kind' property in a US exchange?

Property owned for at least five years
Property with the same fair market value
Property that is identical in use and location
Property of the same nature or character, regardless of grade or quality (Correct answer)

Correct answer: Property of the same nature or character, regardless of grade or quality

Like-kind refers to the nature or character of the property, not its grade, quality, or specific use.

Question 101: What happens if a taxpayer's tax return due date (including extensions) falls before the 180th day of the exchange period?

The taxpayer must file for a special IRS extension
The exchange period ends on the tax return due date, whichever is earlier (Correct answer)
The exchange period is automatically extended to 180 days
The 180-day period always controls

Correct answer: The exchange period ends on the tax return due date, whichever is earlier

The exchange period ends on the earlier of 180 days after the relinquished property closing or the due date of the taxpayer's tax return (including extensions).

Question 102: Can a taxpayer exchange one property for multiple replacement properties in a 1031 exchange?

Yes, as long as identification rules are followed (Correct answer)
Yes, but only if the replacement properties are in the same state
No, unless the QI specifically approves it
No, only one-to-one exchanges are permitted

Correct answer: Yes, as long as identification rules are followed

A taxpayer may acquire multiple replacement properties as long as the identification and acquisition rules under IRC 1031 are properly followed.

Question 103: A taxpayer exchanges a property worth $500,000 for a replacement property worth $450,000 and receives $50,000 in cash. How is the $50,000 treated?

It is treated as boot and is taxable (Correct answer)
It is deferred to the next exchange
It reduces the basis of the replacement property only
It is tax-free as part of the exchange

Correct answer: It is treated as boot and is taxable

The $50,000 in cash received is boot and is taxable to the extent of the taxpayer's realized gain.

Question 104: When a taxpayer eventually sells the replacement property in a taxable sale, which basis is used to calculate gain?

The substituted (carryover) basis from the relinquished property (Correct answer)
The purchase price of the replacement property
Zero, since the exchange deferred all gain
The fair market value at the time of the exchange

Correct answer: The substituted (carryover) basis from the relinquished property

The substituted basis from the 1031 exchange is used to calculate gain when the replacement property is ultimately sold in a taxable transaction.

Question 105: In a delayed (Starker) exchange, what is the correct order of events?

Acquire replacement property first, then sell relinquished property
Simultaneously sell and acquire both properties on the same day
Identify replacement property first, then list the relinquished property
Sell relinquished property first, then identify and acquire replacement property within deadlines (Correct answer)

Correct answer: Sell relinquished property first, then identify and acquire replacement property within deadlines

In a delayed exchange, the taxpayer sells the relinquished property first, then identifies and acquires the replacement property within the 45/180-day deadlines.

Question 106: If a taxpayer's 180th day falls on a Sunday, when must the exchange close?

The preceding Friday
The next business day after the Sunday
The following Monday
The Sunday itself (no extension) (Correct answer)

Correct answer: The Sunday itself (no extension)

The 180-day deadline is absolute — it does not shift for weekends or holidays, and the exchange must close by that date.

Question 107: A taxpayer sells a property with an adjusted basis of $100,000 for $400,000 (no debt) and acquires replacement property worth $350,000. Ignoring selling costs, what is the recognized gain?

$250,000
$300,000
$0
$50,000 (Correct answer)

Correct answer: $50,000

Realized gain is $300,000; the $50,000 shortfall in reinvestment equals the boot received; recognized gain is the lesser of $50,000 or $300,000, which is $50,000.

Question 108: Which of the following would be considered like-kind to an office building in a 1031 exchange?

Corporate stock in a real estate trust
A promissory note secured by real estate
An interest in a real estate partnership
A hotel property held for investment (Correct answer)

Correct answer: A hotel property held for investment

A hotel held for investment is real property and is like-kind to an office building, regardless of use.

Question 109: What is the role of the FINRA in the exchange market?

Regulate brokers and ensure market fairness (Correct answer)
Issue tax refunds
Promote IPOs
Audit health agencies

Correct answer: Regulate brokers and ensure market fairness

The Financial Industry Regulatory Authority (FINRA) plays a crucial role in the exchange market by regulating brokerage firms and their registered representatives. Its purpose is to protect investors and ensure market fairness by writing and enforcing rules governing broker conduct. FINRA helps maintain the integrity and transparency of the U.S. securities industry.

Question 110: What term is used to describe property given up by the taxpayer in a 1031 exchange?

Replacement property
Boot property
Exchange property
Relinquished property (Correct answer)

Correct answer: Relinquished property

The property given up by the taxpayer is called the relinquished property.

Question 111: Which federal agency currently regulates Qualified Intermediaries at the national level?

The Federal Reserve
The IRS (Internal Revenue Service)
The SEC (Securities and Exchange Commission)
No single federal agency — QIs are largely unregulated at the federal level (Correct answer)

Correct answer: No single federal agency — QIs are largely unregulated at the federal level

QIs are not federally licensed or regulated; oversight is primarily at the state level and through industry self-regulation.

Question 112: Must replacement property identification be submitted in writing to qualify under IRC 1031?

Yes, but only if the property value exceeds $1 million
No, oral notification to the QI is sufficient
No, listing on the exchange agreement at closing is sufficient
Yes, identification must be in writing and signed by the taxpayer (Correct answer)

Correct answer: Yes, identification must be in writing and signed by the taxpayer

Treasury Regulations require that replacement property be identified in a written document signed by the taxpayer and delivered to the QI or another qualified party.

Question 113: Which of the following is a violation of exchange rules?

Placing legal bids
Following market news
Front running trades (Correct answer)
Using brokerage tools

Correct answer: Front running trades

Front running trades is a serious violation of exchange rules, where a broker or trader executes orders on a security for their own account with prior knowledge of a pending client order. This allows them to profit from the anticipated price movement before the client's order is executed. It is an unethical and illegal practice that exploits client information.

Question 114: What is the 'drop and swap' strategy in a 1031 exchange partnership context?

Partners receive their interest as tenants-in-common before the exchange so each can independently participate or cash out (Correct answer)
A strategy where the partnership drops out of an exchange and swaps to a REIT
A method to swap one QI for another mid-exchange
A strategy where the QI drops the exchange if values don't match and swaps deadlines

Correct answer: Partners receive their interest as tenants-in-common before the exchange so each can independently participate or cash out

In a drop and swap, partnership interests are converted to TIC interests before the exchange, allowing some partners to cash out and others to do a 1031 exchange independently.

Question 115: Which of the following is the clearest example of 'cash boot' in a 1031 exchange?

Receiving cash proceeds that are disbursed to the taxpayer rather than reinvested (Correct answer)
Assuming a larger mortgage on the replacement property
Paying qualified intermediary fees from exchange proceeds
Receiving non-like-kind personal property at closing

Correct answer: Receiving cash proceeds that are disbursed to the taxpayer rather than reinvested

Cash boot occurs when actual cash is returned to or received by the taxpayer instead of being reinvested through the qualified intermediary into replacement property.

Question 116: What is the primary role of a Qualified Intermediary (QI) in a 1031 exchange?

To negotiate the purchase price of the replacement property
To provide legal advice to the taxpayer
To appraise the relinquished and replacement properties
To hold exchange proceeds and facilitate the exchange to avoid actual or constructive receipt by the taxpayer (Correct answer)

Correct answer: To hold exchange proceeds and facilitate the exchange to avoid actual or constructive receipt by the taxpayer

The QI holds the exchange proceeds and acts as the intermediary to ensure the taxpayer does not have actual or constructive receipt of the funds.

Question 117: A taxpayer closes the relinquished property on June 1. Their tax return (with extension) is due October 15. When does the exchange period end?

June 1 of the following year
December 31 of the same year
November 28 (180 days from June 1)
October 15 (the earlier date) (Correct answer)

Correct answer: October 15 (the earlier date)

The exchange period ends on the earlier of 180 days from closing or the tax return due date; October 15 is earlier than November 28.

Question 118: If a taxpayer continuously completes 1031 exchanges throughout their lifetime and holds the final property until death, what happens to the deferred gain?

The gain is taxed at the heirs' ordinary income rate
The gain is permanently eliminated through the step-up in basis at death (Correct answer)
The gain must be paid within one year of death
The gain transfers to the heirs as-is with no adjustment

Correct answer: The gain is permanently eliminated through the step-up in basis at death

Heirs receive a stepped-up basis to fair market value at the date of death, permanently eliminating all deferred gain from prior 1031 exchanges.

Question 119: For purposes of gain recognition on a 1031 exchange reported on IRS Form 8824, which line captures the recognized gain that flows to Schedule D or Form 4797?

Line 25 — Adjusted basis of replacement property
Line 7 — Fair market value of like-kind property received
Line 20 — Gain recognized (lesser of line 15 or line 19) (Correct answer)
Line 12 — Realized gain on exchange

Correct answer: Line 20 — Gain recognized (lesser of line 15 or line 19)

Form 8824, Line 20 captures the recognized gain as the lesser of the boot received (line 15) or the realized gain (line 19), and this amount flows to Schedule D or Form 4797.

Question 120: Can a taxpayer extend the 45-day identification period for any reason?

Yes, if the replacement property is located out of state
Yes, if a natural disaster has been federally declared (Correct answer)
Yes, with written consent from the QI
No, extensions are never granted under any circumstances

Correct answer: Yes, if a natural disaster has been federally declared

The IRS may extend the 45-day identification period in cases of presidentially declared disasters, but not for ordinary circumstances.

Certified Exchange Specialist (CES)

The CES credential, awarded by the Federation of Exchange Accommodators (FEA), certifies expertise in IRC Section 1031 like-kind exchange rules, qualified intermediary responsibilities, exchange structures, timelines, and tax deferral strategies.

120

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150 min

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