When should a person or company consider an exchange?

There are many factors that must be considered to determine if an exchange will work for any taxpayer, however, the main factors are 1) Will there be capital gains tax due upon selling property? and 2) Do I want to purchase a replacement property?

If the answer is yes to both of these questions, then a 1031 exchange is an excellent tax avoidance tool.

What are the steps to complete an exchange?

For the exchange process click here

How do I begin an exchange?

Please contact us once you put your property on the market. We will then be able to advise on the beginning steps of an exchange. *Remember it is important that a taxpayer not take receipt of sale proceeds from their property sale. If the taxpayer touches the proceeds, an exchange is no longer possible. We will start with:

            The status of your purchase agreement?

            Has a closing date been set?

            Who is the closer on the sale?

Once we have this information, we will prepare the exchange documents and contact the closer to arrange for the exchange documents to be signed at closing.

What is the role of the intermediary in a 1031 tax deferred exchange?

The term Qualified Intermediary is a creation of the United States Treasury Code (Section 1031 of course). Since the tax laws restrict exchanger's from taking receipt of the proceeds funds from the sale of their relinquished property during the exchange, the qualified intermediary is hired to hold those proceeds, as well as, facilitate the exchange. The intermediary must be an independent third party from the taxpayer. The intermediary cannot be an agent of the taxpayer defined as the taxpayer's attorney, real estate agent, accountant or employee. Someone related to the taxpayer such as their spouse, parent, sibling or a related business also can't be an intermediary. Additionally, someone related to the agent of the taxpayer as defined above also cannot be an intermediary. For instance, a title company partially or wholly owned by an attorney or real estate broker where that attorney or broker has provided services to the taxpayer is not qualified to act as that taxpayer's intermediary. 

What property can be part of a 1031 exchange?

Section 1031 of the Internal Revenue Code states that property must be exchanged for property of ?like kind.? This language often produces some confusion in exchanging. Exchangors tend to think they need to exchange for a property of similar use. 

Actually, all real estate in the United States is considered like kind to other real estate so long as it is held for productive use in a trade or business or for investment purposes. For example, a duplex can be exchanged for a four-plex, rental property can be exchanged for retail property, office property can be exchanged for a warehouse, land can be exchanged for improved property etc. A vacation home used strictly for personal use does not qualify. There are some specific rules that will allow a vacation property to qualify for a 1031 exchange. Please call for details.

Personal property exchanges are more restrictive when determining like kind and a taxpayer should consult with their tax professional regarding exchanges of personal property.

How to achieve maximum tax deferral?

To achieve maximum tax deferral upon completing a 1031 exchange, the Taxpayer must avoid receipt of proceeds from the relinquished property sale and purchase a replacement property that is equal or greater in value than the relinquished property sold. Any proceeds received or decrease in replacement property value will likely get taxed as capital gain. A Taxpayer can still complete an exchange with some pro-rata tax deferral, even if these rules are violated, depending on the relinquished property's basis. Of course, a Taxpayer should always work with their tax professional to determine if an exchange is right for them.   

Can I sell or buy more than one property?

Yes, there is no limit to how many relinquished or replacement properties can be part of an exchange. If there are multiple relinquished properties, there are some factors to consider as to whether or not the sales will be considered one of multiple exchanges. The proper identification rules must also be followed if multiple replacement properties are being considered.

How do I file my taxes when I complete an exchange?

IRS form 8824 is used to report a 1031 exchange.  

What if I can't find a suitable replacement property?

That is a great question. Of course, for a 1031 exchange to be completed, a Taxpayer needs to purchase a replacement property. If they fail to purchase a property then the relinquished property will be taxed as an outright sale as if no exchange was ever anticipated. The most optimal strategy is to have a replacement property in mind before beginning an exchange, but that is not always possible. Please see here for the steps to complete a typical forward 1031 exchange and note the 45 day identification period for the Taxpayer (Exchangor) to identify the replacment property.

If a replacement property is not identified within the 45 day period then exchange funds will be returned to the Taxpayer. Please be aware that there are limitations on when funds can be returned should an Exchangor desire to cancel and on-going exchange. The earliest date is 46 days after the sale of the relinquished property.

One of the nice benefits to beginning an exchange is that the Exchangor does have the 45 day identification period to decide if an exchange will work. Many Taxpayers see the 45 day period as an "option" period where they can shop for a suitable replacement property. If they don't find one, then they are able to cancel the exchange by not identifying a replacement property. All exchange funds will then be returned on day 46.    

Please contact us if you have a question to add to our list: info@gainexchangecompany.com