What is a 1031 Exchange?
IRS Code Section 1031 allows investors to defer capital gains tax on the sale of investment property, if certain guidelines are followed.
Who can do an Exchange?
Any individual or entity that is engaged in the accumulation of wealth through long term investing, by the acquisition, holding, and reinvestment of real property.
What is a Qualified Intermediary (QI), and do I need one?
A Qualified Intermediary (QI) acts as a principal, to prepare required documents, and hold the sale proceeds until the purchase of a replacement property.
The IRS rules require the use of a Qualified Intermediary, also known as 1031 Facilitators, or Exchange Accommodators. The QI must be an independent third party and cannot be the exchanger’s attorney, accountant, realtor or agent of the taxpayer.
How Do I Choose a QI?
Carefully – The (QI) plays an integral role in this process by providing investors and their legal, financial, and real estate advisors the level of assistance needed for a successful 1031 exchange.
The Federation of Exchange Accommodators (FEA) is a national organization of Exchange Intermediaries.Because 1031 exchanges are complex transactions, the FEA recommends choosing a Certified Exchange Specialist® (CES®). This designation is awarded only to FEA members who meet specific work-experience criteria and testing.
What is the FEA?
The FEA is a national professional organization of Exchange Intermediaries. It conducts regional and national meetings and requires members to subscribe to a strict code of ethics. They also work with the IRS and other government agencies on Exchange issues. Members are notified of recent court cases, letter rulings and developments on 1031 related matters.
How Do I Start a 1031 Transaction?
1. Plan for the Exchange – Contact us for a FREE Exchange Consultation or visit our website www.1031taxfreesale.com. This will help you with available exchange options.
2. Sell Relinquished Property – Contact us to open an exchange order after you are in contract, and BEFORE closing has occurred.
3. Acquire Replacement Property – Identify property to Keys within 45 days and we will provide the proper forms and review ID methods with you.
Do you need to reinvest in the same state, in a like kind property?
No, the taxpayer (exchanger) sells any investment property – anywhere, any type and buys any type of investment real estate – anywhere within the United States. Exchange is a term used by the IRS to indicate a continuity of real estate investment, even if the property type and location change.
What are the Time Limits on a 1031 Exchange?
The replacement property must be acquired within 180 days of the sale of the relinquished property. Generally three replacement properties are identified within 45 days after the sale.
What Properties Qualify and Do Not Qualify for a 1031?
All properties held for income or investment purposes qualify for non-taxable treatment. Properties that do not qualify include your home, property held for less than one year, stocks, and bonds.
Are There Restrictions on Numbers of Properties Bought or Sold?
No. You can sell 5 houses and buy 1 apartment building, OR, sell a commercial property and buy 50 lots.
Is a 1031 Transaction Completely Tax Free?
It can be depending on an exchanger’s strategy. It is tax deferred until a taxable sale takes place.
How Can I Do a No-Tax 1031 Sale?
Purchase replacement property with equal or greater value and equal or greater debt than the sale property.
Can I purchase a property at a lesser value than the property I sold, or keep cash from the sale?
Yes you can, the difference between sale price and purchase price would be a taxable amount, as would any cash you receive from closing, or remaining funds not reinvested in replacement property.
I have a partner who is not interested in investing any more, can I exchange individually?
Yes you can, depending on how title is held. Your percentage share could go into an exchange for tax-deferred reinvestment and your partner can cash out and pay any applicable taxes due on their proceeds.
I want to protect my assets and buy in a land trust or LLC, but I sold in my name… can I do that?
Yes you can, the IRS considers land trusts and LLCs as disregarded entities and are a pass through to the taxpayer.
I own a triplex; I live in one of the units and rent the other two. Does that qualify for an exchange?
It does qualify for the two units that were rented, but the one you lived in would not, but it does qualify under IRC 121 were a seller of their home would be tax free for a gain of $250K for a single person or $500K for married persons. So in this transaction both IRC 1031 and 121 could apply.
I own a vacation home with considerable gain, I’m selling in the future… can I exchange it?
A change is use would be required to qualify for the exchange, since you are selling in the future you are in good position to prepare for an exchange. To change the property to investment status would be as simple as leasing the property out for at least a year, now its status is investment and income or loss will show on the tax form schedule “E”. Proceeds from the sale can be exchanged into a new investment replacement property. The investment status will have to remain for a least a year after the replacement property purchase.
I’m selling a property with a five year balloon seller financing …do I start an exchange when the note is paid off?
No, an exchange always starts before you close. In an exchange with seller financing note’s payable to your facilitator. When the closing takes place we receive the cash as well as the note. When the time comes to close on the replacement property you buy the note, at face value. All of the funds are in place to close on replacement property. As you receive the payments on the note, only the interest earned is taxable, and not the gain since it was rolled into the exchange.
I would like to exchange into a new income property from a property that hasn’t sold…how can I?
You can do a “reverse exchange”. Since you can’t exchange into a property that you already own, your reverse accommodator, would be titleholder on the future replacement property. When you close on the relinquished property you do a forward exchange into the property the reverse accommodator is currently holding title to. To fall under Safe Harbor guidelines, these transactions would still have a time line of 180 days, with 45 days being the time line to identify the property that is going to be sold. (This transaction has much more details and liability factors to it so its expense is considerably greater than a standard forward exchange.)
I want to build house that will start out as an investment property…how can I build and exchange into it?
Similar to a reverse exchange the facilitator becomes titleholder and all building improvement is done through the facilitator. When the project is completed, as with the reverse exchange, you would exchange the relinquished property into the newly improved property, within the Safe Harbor time frame.
Can I sell to or buy from a relative and do an exchange?
Selling to a relative is no problem because you will be taking your proceeds and do your exchange in the regular manor. Buying from a relative is a different story. In this case the relative you are buying from must be selling a property that would qualify for a 1031 exchange, and do an exchange. Also both parties will need to keep their newly acquired properties for at least two years. If this were not done, the IRS would claim that gains are being kept within the family without taxes being paid.
About Us:
Keys Capital Inc. acts as a Qualified Intermediary for investors nationwide. They are known for their quality, integrity, and rapid response. The current fee for a complete exchange is $550.
Jack Shea, has been an Exchangor since 1985. He is a graduate of the University of Illinois and has been an adjunct Professor in the MBA Program at Florida Institute of Technlogy. He conducts seminars on Land Trusts, Options, and Mortgages. Merle Shea, the President of Keys Capital, Inc., is also an Active Investor, Exchangor, and Consultant.
Keys Capital is a member of the FEA (Federation of Exchange Accommodators). Jack Shea and his son, Daniel Imbior are both Certified Exchange Specialists (CES). They have the required three years experience and have passed the required test. The FEA is a national professional organization of Exchange Intermediaries. It conducts regional and national meetings and requires members to subscribe to a strict code of ethics. They also work with the IRS and other government agencies on Exchange issues. Members are notified of recent court cases, letter rulings and developments on 1031 related matters.
For a free review of your transaction or for any questions contact us.
www.1031taxfreesale.com
Jack Shea and Daniel Imbior (Certified Exchange Specialists)
