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Michael S. Dunn
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Associate
Bray & Co. Real Estate
Ph: 970-384-8908
Cell: 970-309-9249
Fax: 970-945-4026
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INFORMATION FOR
INVESTORS
What is a Tax Deferred Exchange?
A Tax Deferred Exchange is one of the few tax
shelters remaining. Its use permits a taxpayer to relinquish certain
investment property and replace it with other “like-kind” investment
property without triggering capital gains liability.Thus the owner has
additional capital available for the purchase of the “replacement”
property, which otherwise would have been paid in taxes. Payment of the
tax on the gain is deferred until the final “replacement” property is
sold.
What is a Delayed Exchange?
The Treasury Regulation of 1991 acknowledged the ability to do a
“delayed” exchange, as opposed to one done simultaneously. A number of
requirements are imposed including specific time periods for completion
of the exchange. The taxpayer must identify the replacement property
within 45 days and close the purchase of the replacement property within
180 days (or the date of filing tax return if earlier) of the closing of
the relinquished property. Also, the taxpayer cannot receive any
proceeds from the sale of the relinquished property, actually or
constructively.
Thus, if the replacement property is to be purchased subsequent to the
sale of the relinquished property, all money must be held by a
“Qualified Intermediary.”
What is the advantage of a 1031 Exchange?
The primary advantage to performing a 1031 Exchange is that through the
deferment of capital gains taxes the “Exchangor” is able to acquire more
valuable and more leveraged investment property. If it is the intent of
the taxpayer to reinvest the proceeds from one property into another,
the 1031 Exchange remains the only vehicle remaining for full tax
deferment.
The disadvantage is, of course, that funds must remain invested. There
is also the additional cost of the transaction, which is the exchange
fee.
Who may act as a Qualified Intermediary?
The Regulations list those parties who may not be qualified to act as an
intermediary. If the person is the agent of the Exchangor at the time of
the transaction, he is disqualified. This includes any person who has
acted as the Exchangor's employee, attorney, accountant, investment
banker or broker, or real estate agent or broker within the two year
period prior to the date of transfer of the relinquished property, as
well as relatives and controlled corporations. Consequently, the role of
the Qualified Intermediary has generally been filled by title insurance,
escrow, or trust companies.
Issues to consider when choosing a Qualified Intermediary...
• Are they already disqualified?
• What are the chances of bankruptcy?
• In case of misappropriation of funds, do they have a surety bond?
• In case of death or injury, is there a backup?
• How in depth is their exchange agreement?
• How are the funds deposited?
• How quickly can the funds be released?
• What is the fee structure? Beware of hidden fees.
• Do they pay interest on the proceeds being held?
• Are they a member of the FEA (Federation of Exchange Accommodators)?
For more information, visit www.1031.org.
• Do they have a CES designation? Visit www.1031ces.org for details.
What are the qualifications of “like-kind” property?
It is important when identifying a replacement property to choose
“like-kind” property. “Likekind” refers to the intended purpose of the
property rather than the exact description of the property. Certainly
all 1031 Exchanges are real property held for investment purposes,
trade, or business, so the exchange of a rental house for a retail
center, for example, is acceptable.
The tax code specifically lists properties that are not considered
“like-kind.” These include...
1. stock in trade or other property held primarily for sale;
2. stock, bonds, or notes;
3. other securities or evidences of indebtedness;
4. interests in a partnership;
5. certificates of trust or beneficial interest.
6. the property must be in the United States.
Ten considerations when completing a 1031 Exchange...
1. The Taxpayer/Exchangor is advised to consult with his or her CPA or
Tax Attorney.
2. The Exchange Addendum should be added to the Contract to Buy or Sell
Real Estate.
3. Qualified Intermediary (Q.I.) should be notified.
4. When the title work is ordered, add the Q.I. to delivery.
5. Establish the Exchange Agreement with the Q.I.
6. Inform the Q.I. of the closer or contact with the title company.
7. Attend the closing and make sure that the proceeds go directly to the
Q.I.
8. Send your list of Identified Replacement Property(ies) to the Q.I. by
the 45 day deadline.
9. Send the Assignment of Contract Replacement Property to the Q.I.
prior to closing the Replacement Property.
10. Make sure that the Q.I. has transferred the proceeds to the closer
of the Replacement Property and that there is no cash back to the buyer.
If you have any questions on the information contained in this bulletin
please call
Michael S. Dunn at 970-309-9249 |
Disclaimer: This publication is designed to provide accurate and
authoritative information in regard to the subject matter covered.
It is distributed with the understanding that the publisher is not
engaged in rendering legal, accounting, or other professional
service. If legal or accounting advice or other expert assistance
is required, the services of a competent professional should
be sought.
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I will be adding additional important information to this page to assist you in
making the necessary preparations to ensure a smooth transaction when it comes
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comments.
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