IRS 1031 Exchange
A 1031 tax deferred exchange is a fantastic way to transfer your equity and profits from one investment property into another while deferring your taxes. At North Bay Commercial Real Estate we have over 26 years experience assisting our clients in 1031 exchanges. There are various 1031 properties available to you locally or nationally. Please contact us if we can help.
10 steps to a 1031 Exchange
Step 1: IRC section 1031.
Section 1031 of the Internal Revenue Code permits investors to defer taxes on the gain from the sale of property held for productive use in business, trade or investment, provided that the property is exchanged for a “like kind” asset or assets. The section creates a “safe harbor” that permits the taxpayer to have assurance that the transaction will permit the deferral of the capital gain tax payment.
Step 2: Select a Qualified Intermediary.
The IRS requires that the proceeds from the sale of the property (the “relinquished property”) be held by a Qualified Intermediary (a “QI”) until the replacement property is purchased. The taxpayer must assign to a QI their interest as seller of relinquished property.
An “exchange agreement” is executed between the taxpayer and 1031 exchange QI.
Step 3: Include the exchange cooperation clause as an addendum to contract.
It is important to include language in the purchase agreement for both the sale of your relinquished property and the purchase of your replacement property that requires the counterparty to cooperate in the exchange. Typically this is not controversial, as the entire exchange is transparent to your buyer or seller, and there are no delays or costs to them in cooperating.
Step 4: Sale Transfer
The QI signs the HUD1 or Settlement Statement at closing of the relinquished property.
Step 5: Deed
The Deed is direct from exchange to buyer, the QI does not go onto the chain of title.
Step 6: 45 Days
45 days after settlement exchanger must notify the QI in writing of potential replacement properties.
Step 7: Three Property or 200% Rule
When identifying your property or properties you can identify up to three properties or many properties so long as the total price doesn\’t exceed 200% of the relinquished property.
Step 8: 180 Days
You will have 180 days to purchase one or more of the replacement properties. The deadline is sooner if income tax filing is before the 180th day expiration. For example, if you sell your relinquished property on December 15, 2014, and submit your tax filing for 2014 on April 1, 2015, then the acquisition of the replacement property must happen on or before April 1, 2015, and not the typical 180 days after sale. To avoid this trap, have your tax preparer file a timely extension.
At closing of replacement property, assigns the rights in the contract to Qualified Intermediary and the QI then signs HUD1 as purchaser. Deed is direct to exchanger, the QI never goes onto the chain of title.
Step 9: Boot
Any remaining funds are delivered to the exchanger but they may be taxable as boot.
Step 10: Requirements
- Requirements for deferring the entire taxable gain.
- Value of replacement property must be equal to or greater than the value of the relinquished.
- Equity in replacement property must be equal to or greater than equity in the relinquished.
- Debt on replacement property must be equal to or greater than debt on relinquished.
- All of the net proceeds must be used to acquire the replacement property.
- No net boot can be received as it would be subject to tax.
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