What is a 1031 Exchange?
An I.R.C. Section 1031 tax deferred exchange is a process that allows a taxpayer to exchange an investment, rental, business and business personal property and defer the payment of capital gains tax. Normally, there is a delay between the closing of the property being relinquished and the closing of the replacement property.
What are the benefits of a Real Estate 1031 Exchange?
- An I.R.C. Section 1031 Exchange is one of the few strategies available to postpone or potentially eliminate capital gains tax due on the sale of qualifying properties.
- Any gain from depreciation recapture may be postponed.
- Make better informed real estate investment decisions
- Ideal for Equity Preservation and Estate Planning
What is a Qualified Intermediary or Accommodator?
A Qualified Intermediary ("Q.I.") is an independent party who facilitates tax-deferred exchanges pursuant to Section 1031 of the Internal Revenue Code. The Q.I. cannot be the taxpayer, related party or a disqualified person. Your most important decision is choosing your Q.I.! Safety and Experience are foremost.
What are the requirements for valid 1031 exchanges?
The 4 primary safe harbor guidelines for a standard forward or delayed exchange are:
- Use of a Qualified Intermediary ("Q.I.")
- Interest and growth factors (expressly limits the Exchangor's right to "receive, pledge, borrow, or otherwise obtain benefits of money or other property before the end of the 180 day period" )
- Qualified escrow accounts and qualified trusts
- Security or guaranty arrangements
Qualifying Property - Proper Purpose - Like Kind - Exchange Requirement - Exchange must be facilitated by a Qualified Intermediary - the Exchangor assigns ownership of the Purchase and Sale Contract to the Q.I. - replacement property is properly identified within 45 days - the replacement property escrow closes on or before 180 days after the relinquished property escrow closes or the due date of the taxpayers federal tax return for the year in which the relinquished property was transferred, whichever is earlier.
What are the different types of IRC 1031 Exchanges?
Simultaneous 1031 Exchange:
The exchange of the relinquished property and the replacement property occurs at the same time or within one day of each other.
Delayed or Forward 1031 Exchange:
This is the most common type of exchange. A Delayed 1031 Exchange occurs when there is a time gap between the transfer of the Relinquished Property and the acquisition of the Replacement Property, however there are strict time limits, which are found in the Treasury Regulations, or you can contact one of our experts!
Build to Suit or Improvement Construction 1031 Exchange:
This strategy allows the taxpayer to build on, or make improvements to, the replacement property, using the exchange proceeds.
Reverse 1031 Exchange:
A situation where the replacement property is acquired prior to transferring the relinquished property. The IRS has offered a safe harbor for reverse exchanges, as outlined in Rev. Proc 2000-37, effective September 15, 2000. These transactions are sometimes referred to as "parking arrangements" and may also be structured in ways that are outside the safe harbor. We will work with both the safe-harbor and non-safe harbor reverse exchanges. Call one of our experts for further explanation!
Business Personal Property Exchanges:
Exchanges are not limited to real property. Business personal property can also be exchanged for other business personal property of like-kind or like-class. The IRC 1031 does indicate that the primary definition for "like-kind" will be defined as "nature and character" of that tangible asset and what types of assets are eligible as replacements. Grade or quality does not rule out "like-kind".
How do I identify the replacement properties?
There are three rules a taxpayer can utilize to identify potential replacement properties. The taxpayer must meet the requirements of at least one of these rules:
3 - Property Rule:
The taxpayer may identify up to three potential replacement properties, without regard to their value, they can acquire all, any, or partial interest of any of the three properties.
Any number of properties may be identified, but their total fair market value cannot exceed twice the value of the relinquished property.
The taxpayer may identify as many properties as they want, but before the end of the exchange period the taxpayer must acquire replacement properties with an aggregate fair market value equal to at least 95% of the aggregate fair market value of all the identified properties.
How does a standard delayed or forward 1031 exchange work?
After the property has been listed for sale, the taxpayer, Q.I. and the listing or escrow agent have placed an exchange addendum on the accepted contract allowing the assignment; the Q.I. then provides the actions and/or documentation required for the 1031 delayed/ forward exchange. This includes preparing the required exchange agreement, assignment of contract, approving the closing statement, notifying all parties to the contracts of the assignments and giving instructions to settlement or closing agents. We then hold the "relinquished property" proceeds in an account at Mission Bank; the taxpayer then enters into a contract to purchase the "replacement property" which closing must occur within 180 days. The taxpayer will submit a Property Identification Notice to Q.I. within 45 days of closing the "relinquished property" briefly identifying the "replacement property (ies)" they intend to acquire. The Q.I. then facilitates the acquisition of the "replacement property" in much the same manner as the "relinquished property".
Mission Bank 1031 Exchange is a Qualified Intermediary ("Q.I.") and would like to be your Q.I. As your Q.I., we can handle all of you and/or your client's 1031 exchange needs throughout the United States
We believe our skilled team of experts has significant and diversified background in 1031 exchange transactions. Our primary focus is solution management - provided by a nucleus of trained professionals who are available to help you identify a strategy for your individual goals as well as your client's goals and objectives. In addition, we can assist you in choosing the most advantageous of 1031 exchange options.