An Internal Revenue Code (“IRC”) Section 1031 tax-deferred exchange (“Exchange”) is a process that allows a taxpayer to exchange qualified real 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. There are other kinds of 1031 Exchanges, please call one of our experts to find out more about your options.
An Exchange is one of the few tax-saving strategies available to postpone or potentially eliminate capital gains tax due on the sale of qualifying real property.
A Qualified Intermediary (“QI”) is an independent party who facilitates tax-deferred exchanges pursuant to Section 1031 of the IRC. The QI cannot be the taxpayer, related party or a disqualified person. Your most important decision is choosing your QI because safety and experience are foremost.
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) 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. Please contact one of our experts to learn more about what options you have.
Build-to-Suit or Improvement Construction Exchange:
This strategy allows the taxpayer to build on, or make improvements to, the replacement property using the Exchange proceeds.
This is 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 professionals for further explanation.
After the property has been listed for sale, the taxpayer, QI and the listing or escrow agent place an exchange addendum on the accepted contract allowing the assignment; the QI provides the actions and/or documentation required for the 1031 Delayed Exchange. This includes preparing the required exchange agreement, assignment of contract, approving the closing statement, notifying all parties to the contracts of the assignment and giving escrow instructions to settlement or closing agents. The relinquished property proceeds are held in an account at an FDIC insured bank; the taxpayer then enters into a contract to purchase the replacement property and closing must occur within 180 calendar days. The taxpayer will submit a Property Identification Notice to the QI within 45 calendar days of closing the relinquished property briefly identifying the replacement property(ies) they intend to acquire. The QI will facilitate the acquisition of the replacement property in much the same manner as the relinquished property.
The four primary safe harbor guidelines for a standard Delayed Exchange are:
Qualifying Property / Proper Purpose / Like-Kind Exchange Requirement:
An Exchange must be facilitated by a QI. The Exchangor assigns ownership of the Purchase and Sale Contract to the QI, replacement property is properly identified within 45 calendar days, the replacement property escrow closes on or before 180 calendar days after the relinquished property escrow closes, or the due date of the taxpayer’s federal tax return for the year in which the relinquished property was transferred, whichever is earlier.
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 Exchangor can acquire all, any or partial interest in any of the properties listed.
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.
Mission 1031 Exchange is a Qualified Intermediary (“QI”) and we would like to be your QI.
We can handle 1031 Exchange needs throughout the United States for you and/or your clients.
Our skilled team of experts has a significant and diversified background in 1031 Exchange transactions, so we can help you identify a strategy for your individual goals, or your client's goals and objectives, and we will assist you in choosing the most advantageous options.