A 1031 Exchange is the best possible vehicle for the average American taxpayer to build oe preserve wealth. However, we do not provide specific tax or legal advice on 1031 Exchange matters, because we do not know whether the purchase of an investment property will address your particular financial goals. We advise you to consult with your financial, tax, and legal advisors familiar with your situation for more specific advice.
WHY DO A 1031 EXCHANGE?
Those who execute a 1031 Tax-Deferred Exchange are allowed to take virtually all of the proceeds from the sale of an income property and place it into another income property of like kind. It is not uncommon for a seller of income property to needlessly surrender in taxes 25% of the sale price.
The 1031 Tax-Deferred Exchange is described in Internal Revenue Code Section 1031 (IRC 1031.) To quote portions of this code:
No gain or loss shall be recognized on the exchange of property held for investment purposes if such property is exchanged solely for property of like kind.
A 1031 Exchange enables the savvy investor to leverage their position, avoid capital gains tax, and avoid depreciation recapture when selling an investment property, by simply exchanging into another investment property of equal or greater value. You must, however, follow the rules of a properly executed 1031 tax deferred exchange.
SUMMARY OF IRC SECTION 1031 REQUIREMENTS ...
- AN "EXCHANGE" MUST ACTUALLY OCCUR. You must directly swap properties with your Buyer's property; or in exchange for your deed, a Buyer will acquire the replacement property for you; or you must hire an expert to act as the "Trustee", "Facilitator", or "Qualified Intermediary".
- THE TRANSFER MUST INVOLVE THE EXCHANGE OF REAL PROPERTY FOR REAL PROPERTY, ANYWHERE IN THE UNITED STATES. However, business inventory, personal property, securities, and such do not qualify.
- THE PROPERTIES YOU SELL / ACQUIRE MUST BE HELD FOR PRODUCTIVE USE IN A TRADE, BUSINESS, OR AS AN INVESTMENT. Your personal residence does NOT qualify! Any type of real estate used for business, trade, or investment purposes all qualify (e.g., single-family residential rentals, multi-family residential, office buildings, strip malls, farms, ranches, raw land, and other commercial or industrial properties).
- 45 DAY AND 180 DAY MAXIMUM TIMING REQUIREMENTS FOR IDENTIFYING AND ACQUIRING REPLACEMENT PROPERTIES MUST BE MET. You must Identify a replacement property within 45 days, AND you must close within 180 days of the date of the original sale of your property. No exceptions!
- SECTION 1031 IS MANDATORY. If you have accomplished the above 4 requirements, the IRS and the courts will call it an exchange even if you did not intend for it to be an exchange.
We would be honored to represent you in your next 1031 Exchange.
CONTRACTS MUST BE ASSIGNABLE
It is important, however, that the Purchase and Sale Agreements for both properties are assignable. In order to structure a typical exchange transaction, Asset Preservation, Inc. (API) must be assigned in as the Seller of the relinquished property and also as the Buyer of the replacement property. An Exchanger should review the contract to confirm they are not prohibited from assigning their position as either a “Seller” or “Buyer” to a Qualified Intermediary. When a typical exchange is initiated the "Qualifying Intermediary" is shown as the Seller on the Settlement Statement instead of the Exchanger being reflected as the Seller.
“LAST MINUTE” EXCHANGES ARE POSSIBLE
Many real estate investors contact our office minutes before closing on their transaction and successfully convert a sale into an exchange. In most situations, a successful exchange can be accomplished as long as the Qualifying Intermediary is contacted prior to closing.
Exchangers will often add exchange language to their sales contract for two essential reasons:
1. It establishes their intent to perform a Section 1031 tax deferred exchange;
2. To notify the other party in advance of the need to assign the contract to an Intermediary.
The language below is satisfactory to establish the Exchanger’s intent to perform a tax deferred exchange and releases the other parties from costs or liabilities as a result of the exchange:
SALE OF RELINQUISHED PROPERTY CLAUSE:
“Buyer is aware that Seller intends to perform an IRC Section 1031 tax deferred exchange. Seller requests Buyer’s cooperation in such an exchange and agrees to hold buyer harmless from any and all claims, costs, liabilities, or delays in time resulting from such an exchange. Buyer agrees to an assignment of this contract by the Seller.”
PURCHASE OF REPLACEMENT PROPERTY CLAUSE:
“Seller is aware that Buyer intends to perform an IRC Section 1031 tax deferred exchange. Buyer requests Seller’s cooperation in such an exchange and agrees to hold seller harmless from any and all claims, costs, liabilities, or delays in time resulting from such an exchange. Seller agrees to an assignment of this contract by the Buyer.”
REFERENCE MATERIAL:
Note: This page contains one or more references to the Internal Revenue Code (IRC), Treasury Regulations, court cases, or other official tax guidance. References to these legal authorities are included for the convenience of those who would like to read the technical reference material. To access the applicable IRC sections, Treasury Regulations, or other official tax guidance, visit the Tax Code, Regulations, and Official Guidance page. To access any Tax Court case opinions issued after September 24, 1995, visit the Opinions Search page of the United States Tax Court. |