1031 Deferred Exchanges

1031 Tax Deferred Exchanges

Taking their name from section 1031 of the Internal Revenue Code, these exchanges provide investors with one of the best tax strategies for keeping value in a portfolio, by deferring the recognition of the capital gains taxes that would otherwise be incurred on the sale of investment property.

The investor can use all of the equity from the sale of the relinquished property to purchase replacement property. To qualify as an exchange, the relinquished and replacement properties must be qualified “like kind” properties and the transaction must be structured as an exchange. If your tax advisor recommends a 1031 exchange of your investment property, using Runkel Abstract and Title Company as the Qualified Intermediary will provide the necessary reciprocal transfer of properties, and the “Safe Harbor” protection against actual and constructive receipt of exchange funds as required by the tax code. Runkel has access to a local attorney skilled in the complexities of 1031 exchanges.

Is there a timeline for the "exchange period?

Prior to proceeding with the Exchange Period, the Relinquished Property must first be closed, Within 180 days the Replacement Property must be closed as well. This time period is regulated and therefore cannot be extended beyond the time-frame should the day fall on Saturday, Sunday or a legal holiday.

The timeline for the Indentification Period

Within 45 days after the title has been transferred to the Relinquished Property the Replacement Property must be identified. This time period is regulated and therefore cannot be extended beyond the time-frame should the day fall on Saturday, Sunday or a legal holiday.

Indentifying Replacement Property

The “Identification of Replacement Property Form” must be issued in writing to identify the Replacement Property. Within the 45-day timeframe by midnight of that day, the form can only be received by a qualified Runkel associate via hand-delivery, mail or fax. At any time during that time period the form can be amended.

How specific do I need to be?

The form must contain either a legal description or a street address with the city and state identified.

Rules for identifying replacement property.

  1. Three Property Rule You may identify any three properties as Replacement Property.
  2. 200% Rule You may identify as many properties as you wish, as long as the collective value of all identified properties does not exceed 200% of the value of all the Relinquished Properties as shown on the closing statement. If you identify four or more Replacement Properties under this rule, you must include the Fair Market value for each property shown on the Identification of Replacement Property Form.
  3. 95% Exception If you identify more than three Replacement Properties, and the cumulative values of all properties are more than 200% of the value of the Relinquished Properties, you must acquire 95% of the equity of all properties identified.

Where will the proceeds be held?

Upon your instruction, Runkel will direct the proceeds from the Relinquished Property sale into an identified investment fund, then reinvested via savings accounts, certificates of deposit or money markets based on available rates.

Choosing an Exchange Company

Runkel Abstract & Title Co. stongly suggests the following questions be addressed to assess the service level of the exchange company in question.

  1. Is a Qualified Escrow or Qualified Trust available?
  2. Is each exchange fund handled separately?
  3. Where are the funds invested?
  4. What security is in place for the exchange/sale proceeds?
  5. What is required before funds are disbursed?
  6. What bonds or insurance are in place to protect against employee error or theft?
  7. What percentage of the company's exchange transactions are completed successfully?

Beginners Guide to Reverse Exchanges

In a reverse exchange the "replacement property" is purchased before the Exchanger has sold the "relinquished property". Typically, a third party (several options) purchases the Replacement Property for the Exchanger. Then, when the relinquished property is sold to a buyer at a later date (within the 180-day IRS time limitation), the third party completes the exchange by deeding the Replacement Property to the Exchanger.

These 7 easy steps complete a reverse exchange:

Step 1
Exchanger engages us to prepare documentation for reverse exchange transaction.

Step 2
The replacement property must be purchased by the third party before the Exchanger has sold relinquished property to buyer; Exchanger cannot purchase it directly.

Step 3
Exchanger arranges financing for the third party to purchase Replacement Property; these loans can be made by Exchanger, its affiliates or third party lenders.

Step 4
The third party and Exchanger execute reverse exchange documents and the third party purchases Replacement Property (this is the "parking" arrangement).

Step 5
The third party net-leases Replacement Property to Exchanger, who then operates and manages property as lessee.

Step 6
Exchanger sells the relinquished property through a qualified intermediary ("QI"). The QI then uses the proceeds of the sale to purchase the Replacement Property from the third party.

Step 7
Exchanger acquires the replacement property through the QI from the third party to complete 1031 tax-deferred exchange.