The Basic Rules of a Deferred Exchange

Today, if you own Business or Investment held Property, and you are planning on disposing of that Property by means of treating the transaction as a “Sale”, you may be in for a shock. Out of every one hundred dollars of gain (gain being profit), you will have approximately sixty-seven dollars left after paying Uncle Sam federal and in most cases, state income tax associated with your gain. The ALTERNATIVE to this approach of treating your Property as a "Sale" and making Uncle Sam your partner to the tune of approximately thirty-three percent of your gain, is a “Deferred Exchange”, Like-Kind Exchange, or Real Estate all being one in the same. The difference between having your transaction structured as a "Sale", is that you as the seller (taxpayer) of the Business or Investment held Property being disposed of gives REAL ESTATE to the BUYER in which you have had a meeting of the minds with and in return the BUYER gives you CASH for your Property. Were as with an "Exchange", you as the seller give REAL ESTATE to the BUYER, and in return receive back REAL ESTATE of your choice deemed of a "Like-Kind, within the rules of a "Deferred Exchange".

BASIC REQUIREMENTS 

The following are the basic rules that pertain to “Deferred Exchanges under Section "1031" of the Internal Revenue Code.

1. Both the Relinquished Property and the Replacement Property must be held by you for Business or Investment purposes. Neither Property can be used for personal use.

2. The Relinquished Property and the Replacement Property must not be Property you sell to customers, such as merchandise (inventory). It must be Property held for Investment or Property held for productive use in your Trade or Business. Property that would not qualify would include Real Estate that Dealers hold for sale to customers such as a Builder.

3. There must be an Exchangeof "Like-Kind" Property. This concept pertains to the nature or character rather than the grade or quality. Some examples include, an Apartment Building for a Shopping Center, a parcel of Land for a Rental Condo, a Rental Duplex in Buffalo, New York for three Single Family Rental Homes in Tampa, Florida.

4. The Relinquished and Replacement Properties must be tangible Property. These rules for Property deemed of a "Like-Kind", do not apply to Exchanges of stocks, bonds, notes, choses in action, certificates of trust or beneficial interest, or other securities or evidences of debt or interest, or the Exchangeof partnership interests.

5. The Replacement Property must meet “Identification Period”, requirement. The Property to be received must be identified on or before the date that is 45 days after the date you transfer the Relinquished Property.

6. The Exchangemust meet the completed transaction “ExchangePeriod”, requirement. The Replacement Property must be received on or before the earlier of: - The 180th day after the date on which you transfer the Relinquished Property, or - The due date, including extensions, for your tax return for the year in which the transfer of the Relinquished Property occurs. In addition, to these six requirements there are other areas of a Deferred Exchangethat need to be addressed.

Owners of Business or Investment held Properties who are looking to dispose of their Property and have it treated as a Deferred Exchange, need to find a Professional Qualified Intermediary who is in the business of facilitating Real Estate Exchanges. When choosing a Professional Qualified Intermediary you should find one that has the proper training, experience and has a successful track record in performing Real Estate Exchanges.

The Professional Qualified Intermediary works together with the taxpayers (seller) real estate Agent, Attorney and Accountant/CPA in structuring their Real Estate Exchange. A Real Estate sale can be amended (changed) to a Real Estate Exchangeany time before the closing (conveyance of legal title) without the cooperation of the buyer of the taxpayers property. You do not need to find someone who owns a property that you want to swap with. All you need is a buyer for the property you are disposing of and through the use of the professional Qualified Intermediary the rights of the Sales Contract are assigned to the Qualified Intermediary which puts the Qualified Intermediary into the transaction and the proceeds then go through the Qualified Intermediary into a restricted escrow account (Qualified Escrow) which prevents the taxpayer from being in actual or constructive receipt of the proceeds allowing the taxpayer to acquire a replacement property within the one hundred and eighty day "ExchangePeriod". In addition to the assigning of the contract rights, the professional Qualified Intermediary must add all the necessary Exchangedocuments to convert the sale to an Exchangetransaction and is not acting as just an escrow agent. This professional Qualified Intermediary cannot be a "Disqualified Person", which means someone with an agency relationship to the taxpayer such as the real estate agent, attorney or accountant/CPA who represents the tax- payer at the time of the transaction or within a twenty-four month period prior to the transaction. Today, you have the opportunity to take advantage of the "Best Kept Secret In Real Estate, - Real Estate Exchanges" as long as you follow the rules of the game.