Do You Know How to Legally Avoid Taxes When Selling Property?

 
 
  Name
  E-mail
  Phone - -

 
Browse By Topic
Home
1031 Exchange Basics
Qualified Intermediaries
1031 Exchange FAQ
1031 Exchange Procedures
1031 Exchange Do's and Don'ts
Capital Gains Tax Calculator
Site Map
Contact Us

1031 Exchange Presentations
Introduction to 1031
1031 Basics 
1031 Wealth Building

1031 Exchange Form

1031 Exchange FAQ

What is a 1031 exchange?

"1031 Exchange is one of the best strategies remaining to Taxpayers"

On April 25, 1991, the IRS issued deferred exchange regulation-Reg 1.1031(k)-1. This tax code allows taxpayers to defer ALL of the capital gains taxes resulting from their sale of investment property, when they will, use a Qualified Intermediary & following the I.R.S. guidelines, use the money to buy more suitable investment property within 180 days of the close of their sale.

This means that you can reinvest the money you would otherwise have lost to capital gains tax if you will use the extra money to buy more investment property for the purpose of making more money. This can be done within and between all classes of real property anywhere in the USA. Our service team is here to help make 1031 exchange as easy and effective for you as possible.

What Vesting Issues Should be Examined?

In a 1031 Exchange, the entity beginning the exchange will be the entity concluding the exchange. The Intermediary will prepare exchange documentation reflecting the vesting information as shown on the title commitment or title report of the relinquished property. That entity must be the entity to acquire title to the replacement property.

For Example:

Golden LLC relinquishes .................... Golden LLC acquires

Se Bon Partnership relinquishes .................... Se Bon Partnership acquires

Wife relinquishes ............so........ Wife acquires

What are the Delayed Exchange Timeframes?

The §1031 exchanges BEGINS on the earlier of the following:

The date the deed records.

The date possession is transferred to the buyer.

The exchange ENDS on the earlier of the following:

180 days.

The date the Exchanger's tax return is due, including extensions, for the taxable year in which the relinquished property is transferred.

The IDENTIFICATION PERIOD is the first 45 days of the exchange period. The EXCHANGE PERIOD is a maximum of 180 days. If the Exchanger has MULTIPLE RELINQUISHED PROPERTIES, the deadlines begin on the transfer date of the first property. These deadlines may not be extended for any reason.

A deadline that falls on Thanksgiving, Christmas or New Year's Day, does not permit extension.

Identified replacement property that is destroyed by fire, flood, hurricane, etc. after expiration of the 45 day Identification Period does not entitle the Exchanger to identify a new property.

What is the role of the Qualified Intermediary?

The role of the Qualified Intermediary is essential to completing a successful and valid delayed exchange. The Qualified Intermediary is the glue that puts the buyer and seller of property together into the form of a 1031 Exchange. Where such an intermediary (often called an exchange facilitator) is used, the intermediary will not be considered the agent of the taxpayer for constructive receipt purposes notwithstanding the fact that he may be an agent under state law and the taxpayer may gain immediate possession of the money or property under the laws of agency.

In order to take advantage of the qualified intermediary "safe harbor" there must be a written agreement between the taxpayer and intermediary expressly limiting the taxpayer's rights to receive, pledge, borrow or otherwise obtain the benefits of the money or property held by the intermediary.

A qualified intermediary is formally defined as a person who is not the taxpayer or a disqualified person who enters into a written agreement (the "exchange agreement") with the taxpayer and, as required by the exchange agreement, acquires the relinquished property from the taxpayer, transfers the relinquished property, acquires the replacement property, and transfers the replacement property to the taxpayer. The qualified intermediary does not actually have to receive and transfer title as long as the legal fiction is maintained.

The intermediary can act with respect to the property as the agent of any party to the transaction and further, an intermediary is treated as entering into an agreement if the rights of a party to the agreement are assigned to the intermediary and all parties to the agreement are notified in writing of the assignment on or before the date of the relevant transfer of property.

What Property Qualifies for 1031 Treatment?

The following are examples of qualifying properties:

Bare Land..............Office Building

Commercial rental..........Residential rental

Industrial property..........Apartment building

30-year leasehold interest...............Percentage interest in investment property

Garbage truck............Garbage truck

The Exchanger must hold the relinquished property for investment or for productive use in their trade or business to qualify for §1031 treatment. The Exchanger's purpose in holding the property, rather that the type of property, in the critical issue. The intent to hold the property for personal use will prevent the property from qualifying for §1031 treatment. Therefore, second homes will not qualify for §1031 treatment unless the property owner changes how they treat or use the second home. For example, a taxpayer could convert their second home to a valid exchange property and establish this intent by properly renting the property and holding it as a legitimate rental property. Consultation with a tax advisor is important whenever a taxpayer changes how they intend to hold property.

The intent to hold property "primarily for sale" will prevent the property from qualifying for §1031 treatment. Most properties held by developers, builders and people who perform rehabilitation work are held primarily for sale and may not be the subject of an exchange. When these properties are sold, they are subject to ordinary income taxes rather than capital gain taxes.

Partnership interests, notes secured by real property, contract vendors' interests and foreign property (under the Revenue Reconciliation Act of 1989) do not qualify for §1031 treatment.

Is there any special verbiage that belongs in my sales contract pertaining to my 1031 Exchange?

Below is an example of a "Cooperation Clause"

"Buyer hereby acknowledges that it is the intent of the Seller to effect an IRC § 1031 tax deferred exchange which will not delay the closing or cause additional expense to the Buyer. The Seller's rights and obligations under this agreement may be assigned to a Qualified Intermediary, for the purpose of completing such an exchange. Buyer agrees to cooperate with the Seller and Qualified Intermediary to be named, in a manner necessary to complete the exchange."

 
Home | 1031 Exchange Basics  |  1031 Exchange FAQ  |  1031 Exchange Do's and Don'ts  |  Contact Us