Professional Services

1031 Exchange

Tax law governs the treatment of 1031 exchanges. When you call us you will speak with an attorney who will be handling your 1031 exchange (beware of companies that falsely advertise as attorneys but have to refer any legal issues to an outside attorney).

Benefits of a 1031 Exchange

If done correctly, you can sell certain property and defer paying any capital gain tax on the property. This can be very beneficial if you want to acquire additional property. For example if you sold your existing property in a regular sale, you would owe capital gains tax and the amount remaining to acquire another property would be reduced (by the amount of the tax paid). In a successful 1031 exchange you have the full value of the property sold to be used as payment for the property to be acquired.

What Is a 1031 Exchange

Under a 1031 exchange you "sell" (the sale is actually an exchange of property owned for other property- it is not a cash sale ) property used in a trade or business or held for investment in exchange for other property that is used in trade or business or for investment. To qualify as a successful 1031 exchange there are three general rules that must be met;

  • The taxpayer must receive "like-kind" property of the same or greater value as the property being sold (again the property the taxpayer currently holds is exchanged and not sold for cash).
  • The taxpayer must replace the debt on the property sold with the same or greater debt on the property received in the exchange.
  • The taxpayer must maintain equal or greater equity in the property received as existed in the property he or she sold.

In order to successfully complete an exchange ,the taxpayer must plan for the exchange transaction prior to the closing of title on the property sold.. Internal Revenue Service safe harbor guidelines necessitate the use of a Qualified Intermediary (QI) in the exchange process.

A QI, as defined by the IRS, is a third party who is not the taxpayer and who acts to facilitate a deferred exchange by entering into an agreement with the taxpayer for the exchange of properties. We can be the QI for all new clients if the client is using us solely as his or her 1031 legal advisor.

Without a QI, and a written Exchange Agreement entered into between the taxpayer and QI, the IRS may not define a transaction as an "exchange", and the transaction may not qualify for tax-deferred treatment.

How A Section 1031 Exchange Is Accomplished

While there are various steps a 1031 exchange can follow, the following sequence represents the order of steps in a typical 1031 exchange:

  1. Retain the services of tax counsel/CPA.. The 1031 exchange transaction is highly regulated and must be carried out "precisely" as required under IRS regulations.
  2. Sell the property, including a Cooperation Clause in the sales agreement similar to the following: "Buyer is aware that the seller's intention is to complete a 1031 Exchange through this transaction and hereby agrees to cooperate with seller to accomplish same, at no additional cost or liability to buyer." Make sure your escrow officer/closing agent contacts the Qualified Intermediary to order the exchange documents.
  3. Enter into a 1031 exchange agreement with your Qualified Intermediary, in which the Qualified Intermediary is named as principal in the sale of your relinquished property and the subsequent purchase of your replacement property. The 1031 Exchange Agreement must meet with IRS Requirements, especially pertaining to the proceeds. Along with said agreement, an amendment to escrow is signed which so names the Qualified Intermediary as seller. Normally the deed is still prepared for recording from the taxpayer to the true buyer. This is called direct deeding. It is not necessary to have the replacement property identified at this time.
  4. The relinquished escrow closes, and the closing statement reflects that the Qualified Intermediary was the seller, and the proceeds go to your Qualified Intermediary. The funds should be placed in a separate, completely segregated money market account to insure liquidity and safety. The closing date of the relinquished property escrow is Day 0 of the exchange, and that's when the exchange clock begins to tick. Written identification of the address of the replacement property must be sent within 45 days and the identified replacement property must be acquired by the taxpayer within 180 days.
  5. The taxpayer sends written identification of the address or legal description of the replacement property to the Qualified Intermediary, on or before Day 45 of the exchange. It must be signed by everyone who signed the exchange agreement, and it may be faxed, hand delivered, or mailed either to the Qualified Intermediary, the seller of the replacement property or his agent, or to a totally unrelated attorney. Send it via certified mail, return receipt requested. You will then have proof of receipt from a government agency.
  6. Taxpayer enters into an agreement to purchase replacement property, again including the Cooperation Clause. "Seller is aware that the buyer's intention is to complete a 1031 Exchange through this transaction and hereby agrees to cooperate with buyer to accomplish same, at no additional cost or liability to seller." An amendment is signed naming the Qualified Intermediary as buyer, but again the deeding is from the true seller to the taxpayer.
  7. When conditions are satisfied and escrow is prepared to close and certainly prior to the 180th day, per the 1031 Exchange Agreement, the Qualified Intermediary forwards the exchange funds and growth proceeds to escrow, and the closing statement reflects the Qualified Intermediary as the buyer. A final accounting is sent by the Qualified Intermediary to the taxpayer, showing the funds coming in from one escrow, and going out to the other, all without constructive receipt by the taxpayer.
  8. Taxpayer files form 8824 with the IRS when taxes are filed, and whatever similar document your particular state requires.

Services We Offer

We can structure your 1031 exchange so it qualifies for tax deferred treatment and manage the qualified intermediary process. Call us to inquire about or retain us to handle your 1031 exchange.

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