Tax Deferred
At the closing of a typical real estate transaction, the owner pays capital gains on any recognized profit.
A tax deferred exchange is the strategy in which the property owner sells one property and uses the all of
the profit to acquire another property, thereby deferring all capital gains taxes.
Role of Qualified Intermediary
A Qualified Intermediary is an independent company who accommodates the tax-deferred exchanges The QI
is responsible for acquiring the relinquished property and transfers it to the buyer. The QI holds the profit
from the sale of the relinquished property until the replacement property is purchased.
The QI then delivers the funds directly to the closing agent. The QI absolutely must not be related to the taxpayer outside of the 1031 Exchange.
Like - Kind Property
The Relinquished Property and the Replacement Property must be of a “likekind”. The like-kind requirement is very broad. Any real property can be exchanged for any other real property. Real property is considered
land, buildings, and all the things that are attached to the land.
Ineligible Exchange Properties
*Stock in trade or property held primarily for sale
*Stocks, bonds, or notes
*Securities or evidence of indebtedness
*Timber rights
*Personal Residence
*Time-share
*Vacation home
Types of Exchanges
The IRS tax code allows five different types of exchanges. This flexibility offers the exchanger the opportunity to structure a deal in the way that best suits the individual situation.
The Delayed Exchange
The most common form of a 1031 Exchange is a deferred exchange. With a deferred exchange the taxpayer must first sell the relinquished property and then acquire the replacement property.
The Simultaneous Exchange
This is an exchange in which the relinquished property and the replacement property are transferred on the same day.
The Reverse Exchange
This allows the taxpayer to purchase replacement property before the relinquished property is sold. The reverse exchange is a strategy for taxpayers who experience some difficulty finding a buyer for their
relinquished property or who find a property they are eager to buy and must then decide which property in their current portfolio to relinquish.
Personal Property Exchange
This offers the taxpayer the opportunity to make an exchange of a property other than real estate. But, the like-kind property rule is interpreted more narrowly for personal property than it is for real estate.
As a guide, the IRS provides an objective method of property classification. Under this method, personal property will be considered “like-kind” property if it is exchanged for property that falls within either the
same General Business Asset Class or the same Product Class.
The Construction Exchange
This allows for a portion of the proceeds from the sale of the relinquished property to improve or build on the replacement property. This approach works well if the replacement property is less valuable than the
property that is relinquished. When a construction exchange is structured properly, the improvement costs can be used to equalize the exchange.
Tenancy In Common
Tenants In Common (TIC) is a form of real estate ownership in which two or more persons (up to 35 co-owners) acquire a fractional-deeded interest in a property, not having to be equal shares. Every co-owner receives a fee title for an undivided interest, which can be inherited or sold. It is difficult to
locate a property that contains the right purchase price, debt ratio, and closing schedule in the 45 day period to meet the 1031 Exchange requirements, and then arrange the necessary financing, so a TIC is great
solution to this problem.
Deadlines
There are two crucial periods in a 1031 exchange. These time limitations must be met in order to successfully defer the capital gains taxes. The Identification Period - The taxpayer has 45 days from the closing of the
sale of the relinquished property to identify the replacement property.
The Exchange Period - The taxpayer has 180 days to acquire the title of the replacement property.
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