What exactly is a 1031 Tax Deferred Exchange?
It is a transaction in which an individual can increase their net worth through the deferment of capital gains tax.
It is done by relinquishment (sale) of one investment property, with the acquisition (purchase) of another, by a Qualified Intermediary.
Who is a Qualified Intermediary?
A Qualified Intermediary is someone who is not the taxpayer or an agent of the taxpayer (realtor, attorney, accountant or tax adviser, broker, lineal descendant, or employee).
When is the best time to retain an Intermediary?
The best time to retain an Intermediary is when you are in the planning stages. This allows the Intermediary ample time to notify all parties and affords you the opportunity to carefully review all documentation well in advance.
Couldn’t I use my CPA or my attorney for this procedure?
Yes, if that person has not acted as your employee, attorney, accountant, investment banker or broker, or real estate agent or broker within a two year period, preceding the exchange.
Are my funds secure?
When First American Exchange receives the exchange funds from the sale of your relinquished property, we invest them in our name to your account. Interest will accrue until the funds are withdrawn and will be reported under your social security or tax identification number, which we provide to the financial institution.
All interest earned on this account must be reported on your income tax return as income in the year earned, regardless of whether the interest is spent on the replacement property or received by you.
If the amount of interest earned exceeds $10 for a calendar year, the financial institution will furnish a Form 1099 at the end of that year, showing how much interest has been reported to the IRS as earned by you.
Exchanges must be properties “of a like-kind”…..What does this mean?
Like-kind refers to the nature or character of the property. Examples of like-kind include rental properties such as duplexes, triplexes, multi-unit apartment buildings, office complexes, raw land, storage facilities, warehouses, factories, hotels, marinas, farms, parking lots shopping centers, etc.
Assets other than real estate can be exchanged including businesses, planes, boats, trucks and equipment. Exchanger can sell one property and acquire three or vice versa. Both properties must be held as a business use or investment property for a minimum of one to two years.
On the other hand, examples of non-like-kind include primary residences, second or vacation homes, stocks, bonds, notes, or interest in a partnership.
Is there a time limitation in which to complete an exchange?
In a delayed exchange, the replacement property must be designated within 45 days of closing escrow on the relinquished property and the exchange escrow must close within a total of 180 days.
What are the consequences of not completing the exchange in time?
According to IRS guidelines, the exchange becomes null and void if the replacement property has not been designated within 45 days of closing on the relinquished property or if the exchange acquisition exceeds the allotted 180 days.
All funds will be returned to the investor minus First American Exchange nominal exchange fees. The IRS will view the attempted exchange as a sale. As a result, the taxpayer will be responsible for paying all capital gains on the transaction.
Can I close on my replacement property before I find a buyer for my relinquished property?
Yes. This exchange is known as a Reverse Exchange. The IRS Code does not directly define Reverse Exchanges. The IRS has published a Safe Harbor regulation providing for them. However, due to their complexity, First American Exchange recommends you seek independent professional legal counsel before initiating this type of exchange.
Please contact First American Exchange via e-mail or call toll-free 1-800-845-1031 for more information
Can I make improvements on my replacement property?
Yes! A Construction /Improvement Exchange is an exchange where the Intermediary retains ownership to the replacement property and improves it. Once construction is complete, the Intermediary trades or conveys the property to the exchanger.
If you are planning to incorporate improvements to the replacement property into your exchange, please contact First American Exchange as early as possible. An exchange with improvements must be structured a little differently than a standard deferred exchange. Please contact First American Exchange for more information.
Can I take some cash out of an exchange?
Yes, the exchanger is permitted to receive some of the equity. This equity is referred to as “boot” and is a term used to describe unlike property received in an exchange.
Cash, notes, personal property, reduction in mortgage or debt relief are all examples of boot and are subject to tax. Most transactions can be restructured to help reduce or eliminate boot. To avoid boot, an exchanger must trade across or up in equity and mortgage.
Why should I choose First American Exchange (formerly SEAS) as my intermediary?
First American Exchange is one of the oldest Qualified Intermediary in the nation. We represent your interest while working with your counsel and closer. We have extensive experience in all 1031 procedures. We have seen all kinds of transactions.
This helps us to give input to our clients so they structure their transaction, with their legal advisers, to meet the code requirements and their investment goals. We help them to avoid the pitfalls many people fall prey to because of lack of information.
We have fully qualified people to help. We love to answer your questions.
DISCLAIMER: This information is provided to give a general overview of Internal Revenue Code Section 1031. However, as a result of changing tax laws and IRS interpretations, First American Exchange cannot and does not make any guarantees as to its application. First American Exchange is not rendering tax or legal advice. Where tax or legal advice is deemed appropriate, the services of a competent professional knowledged in Section 1031 should be sought.
Washington state law, RCW 19.310.040, requires an exchange facilitator to either maintain a fidelity bond in an amount of not less than one million dollars that protects clients against losses caused by criminal acts of the exchange facilitator, or hold all client funds in a qualified escrow account or qualified trust.