For taxpayers who own business or investment property, Section 1031 of the U.S. Internal Revenue Code allows the deferment of federal income taxes on the exchange of like-kind properties. These exchanges are also termed "Tax Deferred Exchanges", "Like-Kind Exchanges" and "Starter Exchanges."

A 1031 Exchange allows the deferral of Federal capital gains tax and most similar state taxes on the disposition of investment or business property providing a taxpayer more money to invest into qualified replacement property.

For individuals, capital gains are usually taxed by the I.R.S. at a 15% tax rate, which does not take into consideration potential state tax or depreciation recapture (25%). C Corporations are taxed at a rate of up to 35% for capital gains.

The role of the Qualified Intermediary is crucial to the success of your 1031 Exchange. Up until 1990, there were no clear regulations for those taxpayers engaging in the exchange of properties. This was evident in the thousands of exchanges that were challenged and eventually disallowed by the IRS. Finally, in 1991, the IRS issued Regulations governing tax-deferred exchanges. These Regulations provided for the use of a Qualified Intermediary as a "Safe-Harbour" within which to conduct a 1031 Exchange.

Since Qualified Intermediaries are not currently licensed by any federal regulatory agency, it is important for you to research, among other things:

1. How knowledgeable is the Qualified Intermediary in regards to a 1031 Exchange?
2. What processes are followed to ensure the safety of your assets?
3. Is the Qualified Intermediary bonded and insured?
4. Is the Qualified Intermediary a member in good standing with the Federation of Exchange Accommodators?
5. What are the fees for specific services?
6. Will you receive interest on your exchange proceeds?

No. As your Qualified Intermediary, we are not allowed to provide specific tax or legal advice concerning your 1031 Exchange. We will cooperate with your tax advisor to make sure your transaction is completed smoothly.

There are five basic exchange structures:

1. Simultaneous Exchange - This type of exchange usually involves a direct swap of properties between owners.
2. Forward or Delayed Exchange - This is when taxpayer purchases the replacement property after taxpayer sells the relinquished property. There are strict rules and time-frames involved in this type of exchange and requires the use of a Qualified Intermediary or similar Safe Harbour.
3. Build-To-Suit or Improvement Exchange - This type of exchange allows for the taxpayer to construct or improve the replacement property before they actually close on it. The Regulations do not allow for improvements to property the taxpayer has taken title to, so, generally, the Qualified Intermediary will take title to and construct the improvements for the taxpayer. At a later date, the Qualified Intermediary will then convey title to the taxpayer as replacement property.
4. Reverse Exchange - This type of exchange is used when the taxpayer needs to acquire a replacement property before they are able to sell their own relinquished property. In this case, the Qualified Intermediary or another party known as an Exchange Accommodation Titleholder generally closes and takes title to the replacement property until the taxpayer is able to sell their property, under an exchange agreement with the Qualified Intermediary. Once this sale takes place, the Qualified Intermediary then transfers the held property to the taxpayer as their replacement property to complete the exchange.
5. Personal Property Exchange - Personal property, which has been held for business or investment purposes, can be exchanged in the same way as real property, though the like-kind definition becomes much stricter. Generally, personal property can be exchanged for other personal property within the same "General Asset Class" or "Product Class". Examples of personal property exchanges involve construction equipment, corporate aircraft or vessels, office furniture, taxis, farm equipment and even livestock.

You may keep a portion of the proceeds if you wish. However, the funds you decide to keep will be subject to potential capital gains and depreciation-recapture tax. The remaining funds received by the Qualified Intermediary and reinvested into replacement property will be tax-deferred. If you decide to withdraw cash from an exchange, please consult your tax advisor as to your potential tax liability.

Constructive receipt simply means that you have possession, use or benefit of the closing proceeds. The bigger question you should ask is, "How do I avoid constructive receipt?" A properly executed exchange agreement with a Qualified Intermediary before the sale of the relinquished property will help ensure that you will not be in constructive receipt of the sale proceeds.

To defer your entire tax liability, you must meet a few requirements. First, the replacement property you purchase must, at the least, be valued equally to your relinquished property. This means that you must use all of your cash proceeds from the sale toward the replacement property. Also, if there was debt tied to the relinquished property, you must also place an equal amount of debt on the replacement property or inject new cash into the replacement property equal to the debt on the relinquished property. You will be required to pay taxes to the extent that you receive cash or other proceeds ("Boot"), or are relieved of debt in the transaction.

Many types of property, both real and personal, can qualify for an exchange. The IRS states that any property qualifies if it has been held for investment or for productive use in a trade or business. We find it more important to look at the taxpayer's purpose and intent in holding the property rather than the type of property to be exchanged.

The IRS has given little authority as to how long a relinquished property must be held before it can be exchanged. There has been one private letter ruling in which the IRS suggested that a minimum holding period of two (2) years would be sufficient. Though time held is a factor, a bigger issue is the IRS requirement that a qualified property should be held for investment or productive use in a trade or business. The longer you hold the property for the qualified purpose, the stronger your case will be should the IRS ever question your intent.

A property must be held for investment or productive use in a trade or business for it to qualify for a 1031 Exchange. A vacation home which is used more than sparingly by the taxpayer for personal use would be unlikely to qualify for an exchange. Matters such as personal use of the property, a documented fair market value rental history (actually rented or available for rent) and the ability to take investment depreciation can help determine the viability of an exchange of vacation property. Advice from a qualified tax advisor is important for determining whether a particular property is qualified.

Yes. Signing a contract on your relinquished property does not prevent you from entering into an exchange. If an earnest money deposit is accepted please make sure it is held by a qualified party. You must contact a Qualified Intermediary prior to closing on the sale of your relinquished property.

Yes. It is okay to sign a contract on your replacement property and pay an earnest money deposit prior to entering into an exchange, without affecting your exchange transaction.

You have until midnight on the 45th day following the closing on your relinquished property. This period is called the identification period.

Under the Regulations, replacement property is treated as identified for purposes of a 1031 Exchange only if its designation as replacement property meets all of the following: (i) made in a written document; (ii) signed by the taxpayer; (iii) hand delivered, mailed, faxed, or otherwise sent; (iv) before the end of the identification period; (v) to the person obligated to transfer the replacement property or a person involved in the exchange other than the taxpayer or a disqualified person.

Though the Regulations state that identifications may be hand-delivered, Banker Exchange, LLC requires clients to send in their identification by facsimile and certified mail in order to have substantial proof of delivery in a timely manner. An identification contained in the text of an e-mail is not acceptable, as it does not comply with the regulatory requirements.

The IRS Regulations place restrictions on the number of properties which may be identified during the identification period. There are three rules for identifying property:

1. The "3-Property Rule": Up to three properties without regard to the fair market values of the properties;
2. The "200% Rule": Any number of properties, as long as their aggregate fair market value as of the end of the identification period does not exceed 200% of the aggregate fair market value of the relinquished property sold;
3. The "95% Rule": Any number of replacement properties with any aggregate fair market value, but only if the taxpayer ultimately receives identified property constituting at least 95% of the aggregate fair market values of all identified replacement properties before the end of the exchange period.

Any replacement property purchased before the end of the identification period is deemed to have been identified during the identification period. If a property purchased during the identification period is the sole replacement property being purchased, the Regulations do not require a written identification. However, if it is not the only replacement property being purchased, it must be listed in a proper identification in addition to any other properties identified.

No, you do not have to purchase all the properties listed on your identification unless it is the only way to comply with the 95% rule. To experience any tax benefit, though, you will need to close on at least one of your identified properties before the end of your exchange period.

You must close and take title to any or all replacement property within the lesser of:

1. Midnight on the one-hundred eightieth (180th) day following the closing date for the relinquished property
2. the due date of the taxpayer's tax return, including extensions, for the taxable year in which the relinquished property was transferred

This period is called the exchange period.

There are special rules that deal with related parties within Section 1031 of the Internal Revenue Code. Whether you are family or business-entity related parties, you may be able to complete an exchange with the additional requirement that property received from the related property is held for a minimum hold period of two years. These transactions are highly fact specific and a qualified tax advisor is required to properly structure the exchange.

Property that is located in the United States may be exchanged for other property located within the United States or certain territories or possessions of the United Sates. But, when it comes to non-domestic property, it may only be exchanged for other non-domestic property. The IRS code §1031 (h)(1)and(2) states that (i) real property located outside of the United States is not like-kind to real property inside of the United States; and (ii) as well as personal property predominately used outside of the United States is not like-kind to personal property used predominately inside the United States.

No, in general, to qualify as replacement property, improvements to property must be made on property not currently owned by you. Exchange proceeds may not be used to pay down debt on property you already own.

1. If you fail to identify or revoke your identification of replacement property within 45 calendar days after the sale of your relinquished property, the exchange will terminate at the end of the 45-day identification period and any funds remaining in the Exchange Account will be released to you.
2. If you close on all of the identified replacement property within the 45-day identification period, your exchange will terminate at the end of the identification period and any funds remaining will be released to you.
3. If you close on all of the identified replacement property after the identification period expires and prior to the expiration of the 180-day exchange period, your exchange will terminate and any funds remaining will be released to you.
4. If you decide not to complete your exchange or purchase all of your identified property, after the expiration of the identification period, remaining funds cannot be released until the end of your 180-day exchange period.
5. You may revoke your identification at any time prior to the end of the identification period. The revocation will only be valid if it is in writing, signed by the taxpayer, and delivered to our office before midnight of the 45th day identification date.

Yes, this is called a reverse exchange.

Call us at 1-800-431-2834, (or click here to print and fax an information request or click here and complete the online worksheet) and we can help you get started.