When should I consider a 1031 tax-deferred exchange?
If you want to sell real property which you are holding for investment purposes or for trade or business and you plan to reinvest those proceeds in "like-kind" property (other investment real property), you can benefit from doing a 1031 Tax-Deferred Exchange.
Do I need to use an Accommodator?
When doing a 1031 Exchange, there needs to be an independent third party (non-related party) in control of the exchange proceeds. This is usually an Accommodator or qualified intermediary. It can not be a related party such as your brother, your accountant, co-owner, broker or employee.
Can't I leave my proceeds with the escrow company?
No. An escrow company does not qualify as an independent third party. They are considered a neutral third party. Instructing the escrow company to hold your proceeds may be considered constructive receipt by the exchanger and could disqualify the exchange.
If I use an Accommodator, do I still need an escrow company?
Yes. You still need an escrow company to conduct your closing. Your 1031 accommodator will work with the escrow company of your choice to set up your exchange.
If I am doing a simultaneous exchange, do I still need an Accommodator?
Maybe, it's up to you. Keep in mind that the escrow company should not hold your sale/exchange proceeds if for some reason your sale and your purchase don't close the same day. In this case, using an Accommodator is like buying an insurance policy for any unexpected closing problems that might arise.
Do I need a purchase and sale agreement?
Yes. Your accommodator company will need a copy of your sales contract between the seller (exchanger) and the buyer to prepare your exchange documents. With any sale of real estate property, you should have a written contract between the parties involved. The real estate purchase and sale agreement and receipt for earnest money is most commonly used when working with a realtor. (Ask us for our sample language which you can include in your purchase and sale agreement)
If I have already opened an escrow, is it too late to do a 1031 exchange?
No. If you haven't recorded the warranty deed or released possession of the property yet, we can still restructure your escrow for an exchange. Let your escrow officer know you want to do an exchange and call Your accommodator company. They will take care of the details with your escrow officer and structure your closing for a 1031 Tax-Deferred Exchange.
Can I carry a note for the buyers of my relinquished property?
This is something we strongly suggest you discuss with your accountant and then let us know how you will want to structure your exchange.
Are there any tax consequences in a Tax-Deferred Exchange?
Yes there can be. There are basic guidelines and rules regulating 1031 exchanges. We strongly suggest that you contact your accountant for advise on your particular circumstances. Your accommodator company will work with you and your accountant.
What do I need to know about doing an exchange?
You need to be aware of the guidelines and time restrictions. You have a 45-day identification period and a 180-day exchange period that begin the day the warranty deed records on the sale of your relinquished property.
What are the guidelines?
The three basic guidelines for an exchange are (1) the property you are exchanging into must be of equal or greater value as the property you sold; (2) you should use all exchange proceeds; (3) the property you are exchanging into must have equal or greater debt (same or greater loan) as the property you sold. If you don't meet all three guidelines, you could be subject to pay some taxes.
Do I have to use all of my proceeds to do an exchange?
No, but the amount you hold out of the exchange can be considered boot and can be subject to capital gains tax. You will need to work out the details with your accommodator company, your escrow officer, and your accountant before closing. Once your money is in the exchange, it needs to remain there for acquiring real property.
What happens to my exchange proceeds while I look for a replacement property?
Your funds are deposited into an interest bearing money market account where you earn the interest. At the end of your exchange, a cashier's check or money order will be sent to you for all accrued interest.
How do I identify replacement property?
After your accommodator company receives confirmation of your relinquished property recording, they will send you a letter explaining your specific time periods and an identification notice for you to complete and return to us by midnight of your 45th day.
Do I have to wait until my relinquished property records before I look for my replacement property?
No. You can look for your replacement property before or after you sell your relinquished property . Just make sure your escrow officer doesn't record on your purchase until after your relinquished property has recorded. Contact your accommodator company and they will send instructions to the escrow officers to help coordinate the closings.
Do I have to purchase what I identify?
Yes, but you don't necessarily have to purchase everything you identify. There are different ways to identify replacement property which can make your identification decision a little easier.
Can I change my identification notice if I change my mind?
Only if your accommodator company receives your new identification notice before your 45 days have expired and you revoke your previous identification notice in writing. Once your 45 days have passed, you must purchase something from your identification notice.
Can I build on property I already own?
No. Exchange proceeds can only be used to acquire real estate property, but you do have some options which you can discuss with your accommodator company.
Do I have to hold the replacement property for a certain amount of time?
Accommodators suggest holding the property one to two years to prove intent of using the property for investment, but there is no specific time requirement set by the IRS yet. (When buying and selling between related parties, there is a 2 year holding period.)
What happens if after I sell my relinquished property, I can't find a replacement property within 45 days?
If you cannot or do not identify replacement property in writing before midnight of the 45th day, your exchange has failed and your accommodator company will refund to you, via cashier's check, your exchange proceeds plus any interest earned during the 45 days.
Can I do a reverse exchange?
Yes. Please call your accommodator companyfor details and regulations.
