A M E M B E R

O F T H E

O L D R E P U B L I C

T I T L E

I N S U R A N C E

G R O U P

T H E 10 3 1 E X C H A N G E E X P E R T S

®

To prov ide our c l i en t s th e

best IRC §1031 tax exchange

consulting, expert service and

unparalleled financial security.

I S S I M P L E

ur Mission

THE OLD REPUBLIC ADVANTAGE

OREXCO IS WITH YOU EVERY STEP OF THE WAY

LIKE KIND PROPERTY – A WORLD OFREAL POSSIBILITIES

OREXCO GIVES YOU FIVE WAYS TO EXCHANGEThe Delayed ExchangeThe Reverse ExchangeThe Simultaneous ExchangeThe Improvement ExchangeThe Personal Property Exchange

DON’T SELL YOUR INVESTMENT PROPERTYUNTIL YOU DO THE MATHThe Capital Gains Calculator100% DeferralDetermining Proper VestingExchange Contract Addenda

ANSWERS TO YOUR QUESTIONS

GLOSSARY OF TERMS

OREXCO – YOUR NATIONAL1031 EXCHANGE EXPERTS

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Table of Contents

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The Old Republic Advantage – Strength In NumbersWhen you choose OREXCO® (Old Republic Exchange Facilitator CompanyTM),

a wholly owned subsidiary of the nation’s premier title insurance company and

one of the nation’s largest insurance companies, you have the confidence of

knowing our financial strength preserves the integrity and security of your

transaction. The financial strength of Old Republic International Corporation –

a ten billion dollar multi-line insurance company – assures you that your

transaction is financially secure. (NYSE: ORI) Old Republic National Title

Insurance Company consistently earns the highest ratings from Standard &

Poors. Through a written guarantee, Old Republic National Title Insurance

Company assures the security of your exchange proceeds.

Personal and Professional ServiceAt each of our locations across the country, our knowledgeable and professional

staff specializes in understanding your individual needs in the IRC §1031 property

exchange process and will assist you with each step in that process. When necessary,

OREXCO provides complete and concise exchange documentation within hours.

The Industry LeaderOREXCO facilitates thousands of 1031 transactions annually. We are the

unparalleled leader in the exchange business. Our national team consists of

qualified, experienced professionals who will assist you in structuring and

managing your transaction – be it the simple delayed or simultaneous exchange

or the complicated reverse, build to suit, or multi-site commercial transaction.

OREXCO is your national 1031 exchange services solution.

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YourP E A C E O F M I N D

Your first and last concern in the 1031 exchange transaction should be security and

integrity. Are your funds secure and will your transaction be processed accurately

are the two most important questions you will pose to the Qualified Intermediary

handling your exchange transaction. Unfortunately, there is no federal regulation

of the Qualified Intermediary industry. And, because it is fairly easy to become a

Qualified Intermediary – it is imperative that you place your exchange funds

with a Qualified Intermediary that can protect your assets.

Is With YouE V E R Y S T E P O F T H E WAY

IRC §1031 provides that neither

gain nor loss is recognized if property

held for investment or productive

use in a trade or business is exchanged

for property held for investment or

productive use in a trade or business.

Our goal, like yours, is to preserve

and enhance your investment

portfolio. OREXCO will achieve

that goal by providing you with expert

IRC §1031 exchange consulting,

documentation and service. The use

of a Qualified Intermediary to

complete the 1031 exchange is

essential. The experience and

financial strength of OREXCO

makes it the unparalleled leader in

the Qualified Intermediary industry.

We consult with your tax advisor to assure yourtransaction is properly structured to qualify for taxdeferred status.

We prepare the legal documents necessary to facilitateyour transaction, including: the exchange agreement,the assignment agreement, the exchange contractaddendum, the exchange account closing summaryand the identification notice.

We execute closing documents and, where necessary,review and execute financing documents.

We act as the principal, by way of an assignment, in your purchase and sale transactions.

We hold your exchange proceeds so that you do nothave actual or constructive receipt of the funds.

We coordinate with your real estate agent, tax advisor and/or attorney, escrow/closing officer andlender to ensure the smooth and accurate processingof your exchange transaction.

Always consult with your tax advisors. They are essential to a successful tax deferred exchange be it real or personalproperty. Your tax professional will establish values, allocatesales and purchase price, and recommend the appropriatestructure of your transaction.

What We Do

OREXCO

A W O R L D O F R E A L P O S S I B I L I T I E S

Properties that qualify for IRC §1031 treatmentIRC §1031 provides that, to qualify for tax deferred treatment, the relinquishedproperty must be exchanged for replacement property that is like kind. Like kindmeans similar in nature and character notwithstanding differences in grade or quality.The fact that any real estate involved is improved or unimproved is not material forthat fact relates only to the grade or quality of the property and not its kind or class.As such, raw land held for investment may be exchanged for single family rentalsused for a trade or business or any combination of the following:

Single Family RentalsFarms/RanchesOffice/CommercialMotels/HotelsGolf CoursesSome Recreational PropertiesMulti-Family RentalsRaw LandRetail/IndustrialLeasehold Interest of 30 years or more

While the definition of like kind is stricter when it comes to personal property –investors may still take advantage of tax deferred treatment in an IRC § 1031 exchangein the sale of investment personal property. The personal property exchange can beutilized to relocate a business, to upgrade equipment, or to streamline production byreplacing outdated technology and machinery with more efficient models.

Like kind personal property includes:Livestock of the same sexAutomobiles for automobilesBuses for busesCorporate aircraft for corporate jetDoctor practice for doctor practiceManufacturing equipment for manufacturing equipmentRestaurant equipment for restaurant equipment

The fundamental advantages of a tax deferred exchange may be utilized to diversify, consolidate or leverage yourinvestment portfolio. With respect to real property, the broad definition of like kind provides investors withnumerous options to accomplish their investment goals.

LIKE KIND

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gives you

0 Days

Close of FirstRelinquished Property

180 Days

Close of LastReplacement Property

D E L A Y E D E X C H A N G E T I M E L I N E45 Days

End of IdentificationPeriod

OREXCO 511. The Delayed Exchange The most commonly utilized tax planning strategy available toinvestors is the delayed exchange. A delayed exchangeresults when there is a time delay between the sale of therelinquished property and the purchase of the replace-ment property. Also referred to as a “Starker Exchange”because of the landmark 1979 federal case entitled,Starker v. U.S., 602 F2d 1341 (9th Cir. 1979), whereinthe court substantiated the validity of the delayedexchange process. Prior to the Starker case, §1031 of the Internal Revenue Code (promulgated in 1924)authorized tax-free exchanges of real and personal property.Thereafter, Congress, in the 1984 Tax Reform Act,adopted subsection 1031(a)(3) which created the 45 dayidentification period and the 180 day exchange period.Finally, on April 25, 1991, the IRS promulgated thefinal regulations under section 1.1031(a)-1, et. seq. whichprovide specific rules for deferred like kind exchanges.

The delayed exchange provides investors up to 180 days topurchase replacement property once the relinquishedproperty is sold. And, the use of a Qualified Intermediaryis required to facilitate a valid delayed exchange. Thedelayed exchange occurs in three fundamental steps:

STEP ONE: Sale of the Relinquished Property: Beforeclosing on the sale of the relinquished property, theExchanger retains a Qualified Intermediary such asOREXCO. OREXCO prepares an exchange agreement,assignment of sale contract and closing instructions to theescrow/closing agent. OREXCO instructs the escrow/closing agent to direct deed the relinquished property tothe buyer and to deliver sale proceeds directly to OREXCO– thereby preventing the Exchanger from having actualor constructive receipt of the funds. Once the funds aredelivered to OREXCO, access to the funds is restrictedfor the remainder of the exchange period. In short, IRC§1031 provides strict rules pertaining to the release offunds to the Exchanger even where the Exchangerdecides not to proceed with the exchange.

STEP TWO: Identification of the Replacement Property:The Exchanger must identify replacement propertywithin 45 calendar days of the close of the relinquishedproperty. The identification is proper only if the replace-ment property is designated as replacement property in awritten document signed by the Exchanger and handdelivered, mailed, telecopied, or otherwise sent to theperson obligated to transfer the replacement property tothe Exchanger (i.e., the seller of the replacement property)or to any other person involved in the exchange otherthan the Exchanger or a disqualified person. Three identification rules apply:

3 PROPERTY RULE: Three properties no matter whatthe fair market value; or

200 PERCENT RULE: Any number of properties aslong as the aggregate fair market value does not exceed200% (2x) of the fair market value of all the relinquishedproperties; or

95 PERCENT RULE: Any number of properties with-out regard to value – provided 95% of the value of theidentified properties are acquired.

STEP THREE: Purchase of Replacement Property:Within 180 calendar days from the sale of the relinquished property, or the Exchanger’s tax filing date,whichever is earlier, the Exchanger must acquire likekind replacement property and the property acquiredmust be one or all of the previously “identified” replacement properties. The Exchanger again assigns thepurchase and sale contract to OREXCO, who purchasesthe replacement property with the exchange proceedsand causes the transfer of the replacement property tothe Exchanger by way of a direct deed from the seller.

W A Y S T O E X C H A N G E

0 Days

Close of1st Replacement Property(title acquired by EAT)

180 Days

Close of Relinquished Propertyto buyer

R E V E R S E E X C H A N G E T I M E L I N E45 Days

End of IdentificationPeriod

22. The Reverse Exchange A reverse exchangeresults when the replacement property is acquired priorto the sale of the relinquished property. The IRS formallyacknowledged reverse exchanges effective September 15,2000. (See, Rev. Proc. 2000-37.) The Exchanger utilizesthe Qualified Intermediary (“QI”) to purchase thereplacement property and hold title while the Exchangermarkets the relinquished property. As with delayedexchanges, the reverse exchange must be completedwithin 180 days. In order to accomplish this scheme, theExchanger retains the services of an exchange accom-modation titleholder (“EAT”). Many QI’s – throughvarious title holding entities – perform this service.

TWO METHODS FORREVERSE EXCHANGES:

1). Exchange Last aka PARK TITLE TO REPLACE-MENT PROPERTY: Title to the replacement propertyis parked with the EAT. In that case, the Exchangerenters into a written agreement with the EAT – whoacquires title to the replacement property and holds ituntil a buyer is found for the relinquished property.Once the relinquished property is ready to close, the

EAT enters into a simultaneous exchange with theExchanger, transferring title to the replacement propertyto the Exchanger in exchange for causing the transfer ofthe relinquished property to a third party buyer.

2). Exchange First aka PARK TITLE TORELINQUISHED PROPERTY: The QualifiedIntermediary acquires the right to purchase thereplacement property and causes it to be deeded directlyfrom the seller to the Exchanger in exchange for theExchanger’s transfer of the relinquished property to theEAT. The relinquished property is held by the EATuntil a buyer is found. Once the buyer is found, therelinquished property is sold to the third party buyerby the EAT.

In either scenario, the EAT will enter into a manage-ment agreement or master lease with the Exchanger toallow the Exchanger management responsibilities overthe property for the duration of the parking period.And, in a transaction involving financing, the EAT maybecome the borrower under a non-recourse loan. Uponthe expiration of the exchange period or the sale of therelinquished property and transfer of the replacementproperty to the Exchanger, the Exchanger assumes theloan. Likewise, the EAT will require hazard and liabilityinsurance during the holding period.

Timeline: No later than five business days after the EATacquires its ownership interest in the parked property, theEAT and the Exchanger must enter into a writtenqualified exchange accommodation agreement. TheExchanger then has 45 days to identify one or morerelinquished properties. Written identification of therelinquished properties must be delivered to the EAT orto another party to the exchange. The exchange must becompleted within 180 days (i.e., relinquished propertymust be conveyed to third party buyer and replacementproperty must be conveyed to the Exchanger).

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433. The Simultaneous Exchange

A simultaneous exchange occurs when the relinquishedand replacement properties close at the same time. Thisseemingly simple transaction is littered with pitfalls. The use, however, of a Qualified Intermediary such asOREXCO assures the Exchanger that he does not haveconstructive receipt of his funds, thus ensuring thepreservation of safe harbor treatment under the TreasuryRegulations. In the simultaneous exchange, OREXCOtransfers the property to the proper entity and instructsthe escrow/closing agent with respect to the dispositionof sale proceeds. It is incumbent upon the Exchanger tocontact OREXCO prior to closing on the purchase andsale of the relinquished and replacement properties.

4. The Improvement Exchange The Improvement, Construction or Build to SuitExchange occurs when the Exchanger uses exchange proceeds to improve (i.e., make capital improvements)existing property or to improve or develop new replace-ment property. The improvement exchange can occur inthe context of a delayed or reverse exchange. In the context of the delayed exchange – the Exchanger first sellsthe relinquished property using a Qualified Intermediary.Once the sale of the relinquished property is complete,the Exchanger has 45 days to identify the replacementproperty. * Thereafter, the Exchanger enters into a purchase and sale contract for the replacement propertyand enters into a written Qualified ExchangeAccommodation Agreement (“QEAA”) with the QI’sExchange Accommodation Titleholder (“EAT”). TheExchanger then assigns the rights to the purchase andsale agreement to the EAT who uses the exchange proceeds to acquire title to the replacement property andcomplete the identified improvements. Upon completionof the improvements, or at the end of the 180th day,

whichever is earlier, the EAT will transfer title to thenewly improved replacement property to the Exchanger.If – in addition to the exchange proceeds – constructionfinancing is required to complete the improvements, theEAT will become the borrower under a non-recourseloan. When the EAT transfers the property to theExchanger, the Exchanger is substituted as the borrowerand assumes the construction financing.

* The same time frames apply to the improvementexchange in that the replacement property and itsimprovements must be identified within 45 calendardays. If the replacement property is to be produced, theidentification requirement is satisfied if a legal descriptionis provided for the underlying land and as much detail isprovided regarding construction of the improvements asis practical when the identification is made. It is criticalthat the Exchanger receive improvements/replacementproperty that are/is substantially the same as theimprovements/replacement property identified.Likewise, the improvements must be completed and titleconveyed by the EAT to the Exchanger within the earlierof 180 calendar days from the close of the relinquishedproperty or the tax filing date for the Exchanger.

55. The Personal Property Exchange A 1031 tax deferred exchange allows investors to defercapital gain on the purchase and sale of like kind personalproperty, such as aircraft, automobiles, and businessequipment. With respect to personal property exchanges,the like kind requirements are narrower than those forreal property exchanges. Generally, to qualify as likekind, the relinquished and replacement depreciable personal property must be in the same General Asset Classor Product Class. There are 13 General Asset Classes:

Office furniture, fixtures and equipment

Information systems (computers and peripheral equipment)

Data handling equipment, except computers

Airplanes, except those used commercially, and helicopters

Automobiles and taxis

Buses

Light general purpose trucks

Heavy general purpose trucks

Railroad cars and locomotives, except thoseowned by railroad transportation companies

Tractor units for use over-the-road

Trailers and trailer mounted containers

Vessels, barges, tugs and similar water-transportationequipment, except those used in marine construction

Industrial steam and electric generation and/or distribution systems

Although there are no asset classes for non-depreciabletangible property and intangible personal property, suchas copyrights and franchise agreements, such propertymay be eligible for tax deferred treatment when exchangedfor like kind property, i.e., property of the same natureand character. Unfortunately, goodwill of a business isnot considered like kind to goodwill of another business,even where the businesses are the same.

Under IRC §1031, the following property is not eligible for tax deferred status:

Stock in trade or other property held primarily for sale

Stocks, bonds, or notes

Other securities or evidence of indebtedness or interest

Interest in a partnership

Certificates of trust or beneficial interests

Choses in action

OREXCO assists you at every stageof the exchange process. We gatherall necessary documentation from theexchange parties, agents, and escrowofficers; stay abreast of Treasury regulations; and act as a QualifiedIntermediary to help you complete theexchange smoothly and efficiently.

Four Party Exchange with a Qualified Intermediary

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1. Calculate Net Adjusted Basis: Example

Original Purchase Price $400,000

Plus Capital Improvements $25,000

Minus Depreciation Taken ( ) ($175,000)

Equals Adjusted Basis $250,000

2. Calculate Capital Gain:

Current Sales Price $600,000

Minus Exchange Expenses ( ) ($30,000)

Minus Adjusted Basis ( ) ($250,000)

Equals Capital Gain $320,000

3. Calculate Capital Gain Tax:

Gain Attributable to Depreciation $43,750($175,000 x 25% = depreciation)

Plus Federal Capital Gain Tax $21,750($320,000-$175,000 = $145,000 x 15%)

Plus State Capital Gain Tax $32,000(e.g. CA approx. 10% x $320,000 [cap. gain])

= Combined Tax Due $97,500

The formula set forth above is provided to help you determine your approximate gain and the sums that you may wish to defer throughyour exchange transaction. Consult with your tax advisor to determine the correct values and whether an exchange is appropriate foryour circumstances.

Taxes are paid on capital gain, not equity or profit. It is possible to sell property without realizing much profit and still owe substantial capital gains tax. Capital gain is simply thedifference between the sales price and the adjusted basis (i.e.,what you paid for the property, plus amounts spent on capitalimprovements, less depreciation taken) less any closing costsassociated with the sale.

To calculate your estimated capital gain – first subtract theadjusted basis from the sales price; then subtract the costs ofyour transaction, commission, fees, transfer tax, etc.; finally,multiply the capital gain by your combined tax rates (Federaland State) to determine your estimated capital gain tax.

DON’T SEL L YOUR INCOME OR INVESTMENT PROPERTY

Until You

Do the Math

Determining the Proper VestingTo correctly exchange your investment property, youmust hold title to the replacement property exactly asyou held title to the relinquished property. Simply stated,with few exceptions, the person or entity beginning theexchange must be the same person or entity completingthe exchange. The most common problem that arises inan exchange occurs when a husband or wife owns propertyseparately and the new lender requires that both taketitle to the replacement property in order to qualify forthe loan. The addition of the spouse on title to thereplacement property can jeopardize the exchange.Likewise, often partners who own property in a partner-ship wish to sell the partnership property and go theirseparate ways. The partners are disqualified from exchangingtheir individual share of the partnership property.

The following scenarios are disallowed Husband relinquishes and husband and wife acquire propertyof equal value.ABC Corporation relinquishes and XYZ Corporation acquires.ABC Partnership relinquishes and partners acquire as individuals.ABC Partnership relinquishes and XYZ Partnership acquires.Multi-member LLC relinquishes and members acquire as individuals.ABC multi-member LLC relinquishes and XYZ multi-member LLC acquires.

The following are examples of someof the exceptions that apply Husband and wife as trustees of a revocable living trust, whichis a true pass through trust, relinquish, and husband and wifeacquire as individuals.Single member LLC relinquishes and sole member acquires asan individual.Individual relinquishes and individual’s estate acquires due tothe death of the individual.Trustee of a revocable living trust, which is a true pass throughtrust, relinquishes, and Trustee acquires as an individual.

The Exchange Contract AddendaWhen exchanging, insert this language into your purchase and sale contract or call OREXCO for a personalized exchange contract addendum:

PURCHASE AGREEMENT FOR THE SALE OFRELINQUISHED PROPERTYBuyer acknowledges that it is the intention of the Seller to effect an IRC §1031 tax deferred exchange,which will neither delay the closing nor cause additionalexpense or liability to the Buyer. Buyer further acknowl-edges that Seller’s rights and obligations under this agreement may be assigned to OREXCO (“OldRepublic Exchange Facilitator Company”), a QualifiedIntermediary, to facilitate the exchange. Buyer agrees tocooperate with the Seller and OREXCO in a mannernecessary to enable Seller to complete the exchange.

PURCHASE AGREEMENT FOR THEACQUISITION OF REPLACEMENT PROPERTY

Seller acknowledges that it is the intention of theBuyer to complete an IRC §1031 tax deferred exchange,which will neither delay the closing nor cause additionalexpense to Seller. Seller further acknowledges that theBuyer’s rights under this agreement may be assigned to OREXCO (“Old Republic Exchange FacilitatorCompany”), a Qualified Intermediary, for the purpose of completing the exchange. Seller agrees to cooperatewith the Buyer and OREXCO in a manner necessary to enable the Buyer to complete the exchange.

100%Deferral – to fully defer state and federal capital gain taxes, the Exchanger must reinvest all exchange proceedsand either acquire property with equal or greater debt or reinvest additional cash equal to the debt relief. The followingworksheet is a useful tool for determining the amount of cash and debt that should go into the replacement property.

RELINQUISHED PROPERTY Example REPLACEMENT PROPERTY Example

Sale Price: $400,000 Purchase Price: $600,000

Minus Existing Loans: $150,000 Minus New Loans: $375,000

Minus Exchange Expenses: $25,000 Equals Minimum Down: $225,000

Equals Net Proceeds: $225,000

Your minimum down payment for the replacement property should be equal to or greater than the net proceeds from the sale of your relinquished property. Otherwise, you may have boot in the form of cash.

10Orexco does not provide tax or legal advice. Consultwith your tax advisor to determine whether or not anexchange is appropriate for your circumstances.

?What does the term 1031 refer to? 1031 is the number assigned to the Internal Revenue Code Sectionthat provides for the tax deferred exchange of real andpersonal property.

What does the term Starker refer to? It refers to thelandmark 1979 federal case entitled, Starker v. U.S., 602F2d 1341 (9th Cir. 1979), wherein the court substantiatedthe validity of the delayed exchange process. Prior to theStarker case, the courts had never sanctioned an exchangewhereby the relinquished property was sold and, at alater date, the replacement property was purchased.

What are “Safe Harbors”? This term refers to the rulesestablished by the 1991 Treasury Regulations for taxdeferred exchanges which provide that – if followed – theIRS will allow the exchange to qualify.

Why is the tax deferred exchange a popular financialplanning tool? If done correctly, investors defer tax duein connection with the sale of real or personal property,enabling them to access their equity to consolidate, diversify,leverage or relocate their investments.

Why use a Qualified Intermediary? Use of a QualifiedIntermediary is sanctioned as a safe harbor by the IRS.

What is like kind? Real or personal property of the samenature or quality is like kind. Generally, real property islike kind to all other real property, except foreign realproperty, as long as it is held for investment or the pro-ductive use in a trade or business. Personal Property mustbe either the same General Asset Class or Product Class.

How do I properly identify my replacement property?Property is properly identified only if you unambiguouslydescribed it in a written document signed by you andhand delivered, mailed, telecopied, or otherwise sent tothe person obligated to transfer the replacement property toyou (i.e., the Qualified Intermediary or the seller of thereplacement property) or to any other person “involvedin the exchange” other than you or a person disqualifiedunder Treas. Reg. §1.1031(k)-1(k). Real property generallyis unambiguously described if it is described by a legaldescription, street address, or distinguishable name (e.g.,the Mayfair Apartment Building). If at the end of theidentification period – 45 days – you have identified moreproperties than permitted by IRC §1031, it is treated asif no replacement property was identified and theexchange will be disallowed.

What are the 45 and 180 day deadlines? Beginningwith the close of the relinquished property, you have 45days to identify the properties you intend to purchaseand 180 days (or the due date for your tax return –whichever is earlier) to complete the acquisition of thoseproperties. In addition, the 45 day identification periodand the 180 day exchange period are calendar days. Ifthe 45th day or 180th day falls on a weekend or holiday,the deadlines still apply. There are no extensions forSaturdays, Sundays, or legal holidays.

Is there any way to get an extension on the 45 day or180 day deadlines? No extensions are allowed on the45 day deadline. Your identification must be received,signed, in writing, on or before midnight of the 45thday. With respect to the exchange period, it ends on theearlier of the 180th day or the due date (includingextensions) of your tax return for the taxable year inwhich the transfer of the relinquished property occurs.Thus, if the exchange period is cut short by the earlieroccurrence of your tax filing date, you may file for anextension in order to get the full 180 day exchange period.

What is Boot? Broadly defined, boot is considered:1)“Cash boot” – money received (or not reinvested) by you during an exchange. If you carry a note for thebuyer, the note is also considered cash boot.2)“Mortgage boot” occurs when you pay off a loan onthe sale of the relinquished property but do not eitherget a loan for equal or greater value when you buy thereplacement property or invest additional cash equal toyour debt relief. In other words, if you choose not to get a loan on the replacement property, it is perfectlyacceptable to simply come up with the additional cashrequired to purchase the replacement property. 3) Any type of replacement property received that isnot like kind.

If I own a property with another investor, can Iexchange my interest if he doesn’t want to? Yes. Youwould want to clearly allocate each investor’s interest inthe property before you sell. The investor who wishes toexchange may do so, and the other investor may receivecash (taxable). It is, however, very important that theinvestors be clear on their intentions before entering intoan exchange agreement with a Qualified Intermediary.Once a relinquished property is closed where allexchanging parties are under one exchange agreement,the exchangers do not have an option of dividingproceeds and buying separate replacement properties.

AnswersT O Y O U R Q U E S T I O N S

What is a partial tax exchange? If the equity in yourinvestment property is $150,000 and you wanted to useonly $100,000 to purchase your replacement propertyand take $50,000 out to buy a new car, you would havea partially tax deferred exchange. The $50,000 cash youtook to purchase the car is considered taxable cash boot.

May I take out my basis and reinvest only the gain?No. Both basis and gain must be reinvested to defertaxes. The IRS does not allow you to allocate a portionof the money as basis and a portion as gain. Any moneyreceived by the Exchanger will be considered boot andtaxed at a capital gain rate.

What is the net value of the property? Simply stated,the net value is your sales price less your closing costs.The Exchanger is responsible for reinvesting both thecash and the loan amount when they purchase thereplacement property. (See section on Boot.)

Can a carry-back note, drawn in my name, beassigned to the Qualified Intermediary as part of an exchange? No. Once the note is received by you, itwill be taxable boot. Alternatively, to use the note as partof the 1031 exchange, the note and deed of trust mustbe drawn in the Qualified Intermediary’s name.

How does the note become part of the exchange?The note must be drawn in the name of the QualifiedIntermediary. During the 180 day exchange period, you have several options in using the note as part of the exchange:(1) Sell the note to a buyer and liquidate it to cash thatis then added to the exchange proceeds and applied tothe purchase price of the replacement property;(2) Obtain the agreement of the replacement propertyseller to accept the note as part of the purchase price tobe paid for the replacement property;(3) Accept only a short-term note (i.e., due in less than 6 months) that will be paid off in full prior to acquisi-tion of the replacement property. Payments received areadded to the exchange funds and used to purchase thereplacement property.

I own a piece of property that has my own primaryresidence as well as a rental unit. Would it still qualifyfor an exchange? Yes, so long as you remain consistentwith your past tax returns. Consult with your tax advisorto determine the percentage of the value of the propertyyou have attributed to investment. You may exchangethat portion of the value.

How long must I hold a property for investmentbefore I can move into it for my own residence? TheIRS has never established any rule for a required holdingperiod for investment property to qualify under IRC§1031. If you are considering converting investmentproperty to a principal residence, we strongly recommendthat you consult with your tax advisor.

What does the term “disqualified party” refer to?The Treasury Regulations provide that certain persons/entities are disqualified from acting as aQualified Intermediary. Disqualified persons includeanyone who can be considered your agent, anyone whois a related person as defined in the Code, or anyonewho is related, as defined by the Code, to your agent.Your agents include anyone who has acted as youremployee, attorney, accountant, investment banker, realestate agent or broker within the previous two years.

Can I exchange with a related party? Yes, subject tocertain restrictions – namely a two year holding require-ment – you may sell property to or swap property with arelated party. If you engage in an exchange with a relatedperson, you are entitled to non-recognition of gain onlyif the replacement property is held by you for at least 2years and the relinquished property is held by the relatedperson for at least 2 years after the date of the last transferin the exchange transaction. Related persons includemembers of your family and descendants, corporations,tax-exempt organizations and partnerships that are con-trolled orowned by you. The grantor, fiduciary and ben-eficiary of a trust are also considered related parties. Itis not advisable to buy property from a related party.

Do I have access to my money during the exchange?During the exchange transaction, your exchange proceedsare placed in an exchange trust account so that you donot have actual or constructive receipt of the funds. Ifyou have not identified property, you may not receivethe exchange funds until after the expiration of the 45thday. If, however, you identified property but you laterdecide not to exchange, you may not access the fundsuntil the expiration of the 180 day exchange period.(Some limited exceptions apply.)

What are exchange expenses? Certain expenses incurredin selling the property, which include, but are not limitedto, the real estate commission, exchange fees, legal feesand transfer taxes, may be paid from the proceeds of thesale of the relinquished property thereby reducing theamount that must be invested in the replacement property.

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ur MissionACCOMMODATOR or QUALIFIED INTERMEDIARYor FACILITATOR – A person or other entity who assists theExchanger to effect a tax deferred exchange by holding theexchange proceeds and acting as the principal in the sale ofthe relinquished property and purchase of the replacementproperty. The accommodator/intermediary/facilitator cannotbe the taxpayer, a related party or an agent of the taxpayer.

ADJUSTED BASIS – Simply stated, the adjusted basis isequal to the purchase price, plus capital improvements, lessdepreciation. Transactions involving exchanges, gifts, probatesand trust distributions may impact the property’s adjustedbasis. The Exchanger’s tax or legal advisor is the proper partyto determine adjusted basis.

BASIS – The starting point for determining gain or loss inany transaction. In general, basis is the cost of the property.

BOOT – Boot is any type of property received in an exchangethat is not like kind, such as cash, mortgage notes, a boat, orstock. The Exchanger pays taxes on the boot to the extent ofrecognized capital gain. In an exchange, any funds not used topurchase the replacement property will be called boot.

CAPITAL GAIN – Generally speaking, this is the differencebetween the sales price of the relinquished property – less sellingexpenses – and the adjusted basis of the property.

CONSTRUCTIVE RECEIPT – If the Exchanger has controlover the exchange proceeds or property during the exchangeperiod, he may be deemed in constructive receipt. If the Exchangeractually or constructively receives the exchange proceeds orproperty, the exchange will not qualify under IRC §1031.

DEFERRAL – The capital gains tax is not paid until such time (i.e., it is “deferred”) as the Exchanger sells the replacementproperty without engaging in another tax deferred exchange.

DIRECT DEEDING – At the direction of the QualifiedIntermediary, title is conveyed directly to the ultimate ownerswithout the Qualified Intermediary being in the chain of title,thus avoiding the imposition of additional transfer tax.

EXCHANGE ACCOMMODATION TITLEHOLDER(“EAT”) – the entity that holds title to either the relinquishedproperty or the replacement property in connection with areverse exchange. In most cases, the EAT is affiliated with theQualified Intermediary handling the reverse exchange.

EXCHANGE PERIOD –The time allowed for theExchanger to acquire the replacement property in a delayedexchange, or the time allowed to dispose of the relinquishedproperty, in a reverse exchange. In a delayed exchange, it startson the day the relinquished property is transferred or in areverse exchange, it starts on the day the property is acquiredby the EAT. It ends on the earlier of the 180th day after thetransfer or if no automatic extension is applied for then on theday the Exchanger’s tax return in due – often April 15th if theExchanger is not an entity on a different fiscal tax year.

IDENTIFICATION PERIOD – Within 45 days from theclose of the relinquished property, the replacement propertymust be identified in accordance with one of the three adopt-ed rules. In a reverse exchange, the relinquished property mustbe identified within 45 days from the acquisition of thereplacement property.

LIKE KIND PROPERTY – Refers to the nature or quality of the property the Exchanger gives up or receives in theexchange, such as real property for real property. Real propertydoes not have to be similar in use, such as raw land for rawland. Raw land may be exchanged for any other real propertythat will be used in a trade or business or held for investment.Real property located in the United States and real propertylocated outside of the United States are not like kind. PersonalProperty must be either the same General Asset Class orProduct Class.

OREXCO LLC – A single member LLC acting as the EATfor OREXCO in reverse exchanges.

QUALIFIED EXCHANGE ACCOMMODATIONAGREEMENT (“QEAA”) – A written agreement wherebythe EAT agrees to purchase and hold title to the replacementproperty or relinquished property until the Exchanger is ableto sell the relinquished property.

REALIZED GAIN – Refers to gain that is not yet taxed. In asuccessful exchange, the gain is realized but not recognizedand therefore not taxed.

RECOGNIZED GAIN – Refers to the amount of gain thatis subject to tax when property is disposed of at a gain or profit in a taxable transfer.

RELATED PARTY – IRC §267(b) and 707(b)(1) definesrelated party as any person or entity bearing a relationship tothe Exchanger such as: members of a family – brothers, sisters,spouse, ancestors and lineal descendants; a grantor or fiduciaryof any trust; two corporations which are members of the samecontrolled group or individuals; corporations and partnershipswith more than a 50% direct or indirect ownership of thestock, capital or profits in these entities.

RELINQUISHED PROPERTY (Property Sold) – Theproperty given up by the Exchanger in the 1031 exchangetransaction. This portion of the exchange transaction is some-times referred to as Phase One.

REPLACEMENT PROPERTY (Property Bought) – Theproperty the Exchanger acquires in a 1031 exchange or PhaseTwo of the transaction.

TRANSFER TAX – A tax assessed by a city, county or stateon the transfer of property that may be based on equity orvalue. The use of direct deeding in an exchange avoids additional transfer tax.

Glos sar y O F T E R M S

Call our National Office at

800-738-1031Visit us at www.orexco1031.com

Unfortunately, there is no federal regulation of the Qualified

Intermediary industry. And, because it is fairly easy to become a

Qualified Intermediary – it is imperative that you place your

exchange funds with a Qualified Intermediary that can protect your assets.

At OREXCO, your exchange proceeds are backed by Old Republic National Title

Insurance Company, a wholly owned subsidiary of Old Republic International

Corporation – a ten billion dollar multi-line insurance company. When you

choose OREXCO, you assure yourself that your exchange funds are secure and

your documents are timely and accurately prepared.

We hope this guide provides you with useful information so that you can have a

meaningful conversation with your tax advisors regarding your specific situation.

If you have additional questions, please call one of our regional offices located

throughout the United States or visit our website for up to date information and

resources at www.orexco1031.com.

FEA MEMBER: FEDERATION OF EXCHANGE ACCOMMODATORS

OREXCO does not provide tax or legal advice. Consult with your tax advisorto determine whether an exchange is appropriate for your circumstances.

E X P E R T S

Y O U R N A T I O N A L

1031 Exchange

14

®

Visit our website at www.orexco1031.com

©2004 Old Republic Exchange Facilitator CompanyTM

All Rights Reserved.

Atlanta, GA 866.330.1031

Boston, MA 866.663.1031

Carmel, CA 888.822.1031

Cincinnati, OH 888.583.1031

Deerfield Beach, FL 888.447.1031

Honolulu, HI 877.591.1031

Houston, TX 866.622.1031

Irvine, CA 866.990.1031

Jackson, MS 888.304.1031

Las Vegas, NV 888.893.1031

Los Angeles, CA 888.303.1031

Minneapolis, MN 800.328.4441 (x1166)

Oakland, CA 800.738.1031

Petaluma, CA 888.677.1031

Philadelphia, PA 866.803.1031

Phoenix, AZ 888.685.1031

Riverside, CA 888.429.1031

Sacramento, CA 800.616.1031

San Diego, CA 888.944.1031

San Francisco, CA 866.883.1031

San Jose, CA 888.822.1031

Seattle, WA 800.591.1031

Tampa, FL 888.437.1031

National Accounts 800.738.1031