1031 Exchange

What is a 1031 Tax Deferred Exchange?
The code allows you to sell (Relinquished Property) one or moreInvestment properties and buy (Replacement Property) one or moreproperties through a Qualified Intermediary (QI). The sellercannot touch or control the funds. The QI documents must be signed prior to closing of theInvestment property being sold.The property can be anywhere in the US
Questions: Answers:
 
What are the time and procedural requirements of an IRC Section 1031 exchange?
 
a) Both the Relinquished Property and the Replacement Property must be qualifying "like-kind" real property held for investment, as defined as appropriate under Federal law.
b) The transaction must be documented and structured by a Qualified Intermediary to provide for interdependence between the Relinquished and Replacement properties.
c) Replacement Property must be identified, in writing, within 45 days, and must be acquired by the 180th day. There are no extensions for weekends or holidays.
d) The Exchanger must not have actual or constructive receipt of the funds at any time during the course of the exchange.
 
What things should I consider when looking and/or purchasing Replacement Property?
 
There are three (3) factors to consider for completion of your 1031 Exchange:

   1. Property Value needs to be of equal or greater value than the Property (ies) sold, less closing costs and commissions.
   2. Debt relief: If you paid off a loan on your Sale, the IRS requires you take on equal or greater Debt in your Purchase. (Note: Cash may offset such debt; however, Debt may NOT offset Cash.)
   3. Cash: All proceeds from the close of your Sale(s) must be applied to your Replacement Property(ies) to avoid a taxable event.

For additional information please see our Rules to Identify the Replacement Property section.
 
Is a Qualified Intermediary necessary to complete a concurrent tax-deferred exchange?
 
It benefits the Exchanger to utilize an Qualified Intermediary because of the risks and liability in concurrent exchanges. Documentation provided by the QI would protect the Exchanger in case the close was delayed for any reason. If such documentation was not in place the Exchanger could not benefit from the 1031 Exchange, and thus pay tax on the proceeds from their Sale.
 
Can I get an extension to identify replacement property or to complete my exchange?
 
The IRS will not extend the time requirements related to tax-deferred exchanges, however, if you are within your exchange period and your tax returns are due, you can file for an extension in order to complete your exchange by the 180th day.
 

Can funds be returned to Exchanger if the exchange is not completed?
 
The IRS Code 1031 clearly states that the Exchanger can receive the exchange funds if, 1) they fail to identify a Replacement Property on the 45th day and may receive the funds on the 46th day, or 2) Exchanger fails to acquire Replacement Property and may receive funds on the 181st day.
 
Who controls the proceeds?
 
The proceeds must be held and controlled by a Qualified Intermediary, not by an agent, escrow, or related party which includes relatives.


Deferred Exchange Process
The Exchanger, using a Qualified Intermediary (QI), sells their property (Relinquished Property) to a Buyer. The proceeds from this sale then go towards the purchase of a Replacement Property, again using the QI. The flowchart below shows this process and is followed by a more detailed step by step description.
   1. Exchanger transfers right, title and interest to the QI at the moment of close on sale escrow.
   2. All documents pertaining to the sale must be signed by all parties prior to the close of escrow.
   3. QI receives proceeds from sale escrow and places them in an interest bearing account.
   4. Exchanger identifies Replacement Property within the 45 day identification period.
   5. Exchanger transfers all right, title and interest to QI at moment of close of purchase escrow.
   6. All documents pertaining to the purchase must be signed by all parties prior to the close of escrow.
   7. QI sends all funds, including any interest earned, from account towards purchase escrow.
   8. Any excess proceeds will be disbursed to Exchanger from escrow at close of purchase. If more than one purchase applies, excess monies will be sent at close of last escrow.

The above Information was supplied by Mid-Exchange accomodators. It is for information only. If you are thinking of doing a 1031 exchnage you are advised to contact Mid-Exchange or any other accomodator for up to date information.

For more Information on 1031 exchanges try our recommended links
www.1031.org
www.irs.gov