Certified Exchange Specialist (CES) — Questions and Answers

Question 1: Which of the following would be considered like-kind to an office building in a 1031 exchange?

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

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

Yes, but only if both properties are in the same state
No, consolidation exchanges require a special IRS ruling
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 3: 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?

95% rule
200% rule (Correct answer)
Three-property rule
Unlimited property 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 4: 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 QI receives installment payments on behalf of the taxpayer
The taxpayer completes the 1031 exchange before receiving any installment payments (Correct answer)
The taxpayer exchanges the installment note for like-kind property

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 5: 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?

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

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

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

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

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

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 8: 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 9: What is a key purpose of regulatory compliance in securities exchange?

To stop mergers
To protect investors and promote transparency (Correct answer)
To eliminate public companies
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 10: 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)
Immediately recognized as ordinary income at the time of the exchange
Only deferred on residential rental property, not commercial property
Permanently eliminated by the exchange transaction

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

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

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 12: 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 reduces the basis of the replacement property only
It is tax-free as part of the exchange
It is treated as boot and is taxable (Correct answer)
It is deferred to the next 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 13: Which of the following is a violation of exchange rules?

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

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

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

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

Only when the taxpayer files a 1031 election with the IRS
Only at the time the exchange is initiated
Only when the replacement property is sold
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 16: In a 1031 exchange in which no boot is received and the taxpayer fully reinvests all proceeds into qualifying replacement property, the result is:

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

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

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

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

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

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

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

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 20: 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 structure that allows exchange of raw land only
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 where improvements are made to the relinquished property before sale

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

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

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

Depreciation restarts fresh at the replacement property's full purchase price
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 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 23: A taxpayer can eliminate mortgage boot arising from reduced debt on replacement property by:

Adding cash to the exchange or acquiring replacement property with equal or greater debt (Correct answer)
Paying down the relinquished property's mortgage before listing the property
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 24: 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 25: Which statement about personal property and 1031 exchanges after the Tax Cuts and Jobs Act of 2017 is correct?

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

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

The dollar value of the property
The intent of the taxpayer at the time of purchase and sale (Correct answer)
Whether the property is financed or owned free and clear
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 27: Can a taxpayer extend the 45-day identification period for any reason?

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

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.

Question 28: Which of the following is considered 'exchange expenses' that reduce boot in a 1031 exchange?

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

Correct answer: Qualified intermediary fees

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

Question 29: What is depreciation recapture, and how does it affect a 1031 exchange?

Depreciation recapture must be paid in full before the exchange can proceed
Depreciation recapture only applies to residential rental properties
Depreciation recapture is eliminated in a 1031 exchange
Depreciation recapture is deferred along with the capital gain in a successful 1031 exchange (Correct answer)

Correct answer: Depreciation recapture is deferred along with the capital gain in a successful 1031 exchange

In a successful 1031 exchange, depreciation recapture (taxed at 25%) is also deferred along with the capital gain.

Question 30: 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 31: 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?

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

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

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

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.

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.

Questions

38 min

Time Limit

75%

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