1031 Deferred Tax Change

A tax-deferred 1031 exchange is a transaction that allows homeowners to preserve the full value of their investment property. A 1031 Exchange allows homeowners who decide to dispose of their investment property to do so and avoid having to pay capital gains taxes by allowing them to reinvest the proceeds from their sales in “like-kind” properties.

GENERAL DESCRIPTION

The general rules that govern a 1031 exchange are quite simple. Any type of property (real estate or personal) can be exchanged as long as the transferred property has previously been held for investment purposes. In most circumstances, a personal residence will not qualify as a tax-deferred exchange.

1. AS KIND The replacement property must be “like in kind” to the relinquished property. “Like kind” does not mean exactly the same thing. Most real estate is considered “similar” to other real estate, such as exchanging a single-family rental home for a condo, warehouse, or office building.
2. PROPERTY VALUE As a general rule, the property you acquire should have a value and equity equal to or greater than the property transferred.
3. IDENTIFICATION PERIOD – The property to be acquired must be identified within 45 days following the closing of the transferred property. Property identification rules include:
4. Three (3) PROPERTY RULE: Up to three (3) properties may be identified, whatever their value,
5. GOLD 200 PERCENT RULE: Any number of properties may be identified, as long as their combined fair market value is not more than twice the value of the relinquished property.
6. GOLD 95 PERCENT RULE: Any number of properties can be identified, regardless of their combined FMV, as long as you purchase 95% of that total value.
7. PERIOD OF CHANGE – The acquisition of the new property must be completed within 180 days of the transfer of the relinquished property, or before the tax return filing date of the year in which the first property was transferred, whichever occurs first. These time restrictions must be strictly followed for the IRS to allow the exchange. the IRS it’s not grant extensions.
8. STEPS INVOLVED IN A SUCCESSFUL EXCHANGE
9. purchase contract. A contract is executed between Buyer and Seller for the purchase and sale of the relinquished property. The purchase contract must contain a “cooperation clause” in which Buyer agrees to cooperate with Seller to structure and complete a 1031 exchange. Seller (or Buyer) will assign its interest in the agreement to a Facilitator or Qualified Intermediary ( FAC or QI).
10. open exchange. The exchange is established with the FAC or QI usually after escrow has been opened to close the sale. Then the necessary documentation must be prepared to carry out the exchange. The Exchange Agreement (between the taxpayer and the FAC or QI) defines the exchange transaction and establishes the obligations of both the taxpayer and the FAC or QI. An Assignment of the purchase and sale contract of the property assigned to FAC or QI is prepared, assigning the rights as Seller to FAC or QI.
11. Closing of relinquished property. Relinquished property closes when all conditions of sale have been met and ownership is transferred to Buyer. While the transfer will be directly from Seller to Buyer, it will represent a transfer from Seller to the FAC or QI in exchange for other goods to be received at a later date. The proceeds of the sale are delivered directly to the FAC or QI for the replacement property. At no time shall Seller be on actual or implied receipt of cash proceeds.
12. Identification of the replacement property. The period of time to identify the property (or properties) to be purchased as the replacement property begins with the closing of the relinquished property. Forty-five (45) days are allowed from the date of transfer to identify the acquisition property.
13. Replacement property purchase contract. After identification of a suitable “like” replacement property and a decision as to which property will be purchased, a purchase contract will be signed with Seller. The property must be one or more of the properties identified at the end of the 45-day identification period.
14. Acquisition Property Redemption Documentation. Then the Assignment of the purchase contract of the replacement property and the Release and Guarantee must be prepared to be executed by the Buyer and the Seller. Instructions should also be prepared for the settlement agent outlining the items needed to complete the exchange.
15. Close replacement property. When the closing conditions have been met, the FAC or QI must turn over the funds it has been holding to the liquidation agent to purchase the replacement property. Seller will transfer replacement property directly to Buyer. Closing on the replacement property must occur within 180 days of the transfer of the relinquished property (or before the tax return due date, if earlier) for the transaction to qualify for replacement property treatment. Section 1031.