Section 1031 is a provision of the Internal Revenue Code which governs tax-deferred or "Starker" exchanges. The Tax Reform Act of 1984 simplified the rules and regulations governing tax-deferred exchanges. With proper structuring, §1031 allows a taxpayer to dispose of a property (called the "Relinquished Property") and acquire another property (called the "Replacement Property") without incurring a current federal income tax liability. Several conditions must be satisfied to qualify under §1031. First, the proceeds from the disposition of the Relinquished Property must be held by a "Qualified Intermediary". In addition, the properties involved in the exchange must be of "like-kind", and two critical time requirements must be satisfied.
TIME REQUIREMENTS
Section 1031 requires an Exchangor to identify its potential Replacement Property(ies) within 45 days after the closing of its Relinquished Property. Generally an Exchangor is limited to identifying three potential Replacement Properties. In addition, an Exchangor must acquire its Replacement Property(ies) within 180 days from the closing of its Relinquished Property. The failure to meet either of these time requirements will prohibit the Exchangor's ability to defer tax using a §1031 exchange.
LIKE-KIND REQUIREMENT
To qualify as a tax-deferred exchange, the Relinquished Property and the Replacement Property must be of "like-kind" and the exchanged properties must be held either for investment or for use in the taxpayer's trade or business. Land is an example of investment property. A rental property is an example of property used in a trade or business. Generally, investment property may be exchanged for trade or business property. However, real estate must be exchanged for other real estate and personal property must be exchanged for other personal property. In the case of real estate, the type of property is not important. Accordingly, land, office buildings, apartments, rental homes and condominiums are all real estate and qualify as "like-kind" property.
REPLACEMENT PROPERTY IDENTIFICATION
Section 1031 requires an Exchangor to identify its potential Replacement Properties within 45 days of the closing of its Relinquished Property. Section 1031 allows an Exchangor to identify up to three properties. An Exchangor may identify more than three properties if the value of the identified properties does not exceed two times the value of the Relinquished Property, or if the Exchangor acquires 95% of the properties identified. Under this latter exception, the 95% test is based on the fair market value of the properties.
COMMON MISCONCEPTIONS REGARDING EXCHANGES
Section 1031 may cause an exchange to be partially or fully taxable if the Exchangor receives any cash from the exchange; if the Exchangor provides the buyer with financing; or if the purchase price of the Replacement Property is less than the sales price of the Relinquished Property. In addition, §1031 prohibits a taxpayer from selling its property and acquiring another property without engaging the services of a "Qualified Intermediary".
TMES AS QUALIFIED INTERMEDIARY
A non-simultaneous tax-deferred exchange may not be accomplished without the services of a qualified Intermediary who will prepare all required exchange documentation. Your net sales proceeds will be deposited in an individual escrow account at an FDIC insured institution. You will receive credit for all interest earned on your monies. In addition, we will assist you in the event that your tax-deferred exchange is audited.
SUMMARY FEE SCHEDULE
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