"Robert G. Lowe, PL" and rgllaw® are trademarks for legal services.
This site was last updated August 2011.
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Robert G Lowe, PL
Attorney and Counselor at Law
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PO Box 16626
Clearwater, Florida 33766
Phone: 727.647.3700
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1031 TAX DEFERRED EXCHANGE FAQ |
For personalized answers to your specific situation please contact Bob by e-mail or by phone at 727-647-3700. |
| What is an 1031 tax deferred exchange? IRS Code Section 1031 provides investors and businesses with a method to defer capital gains liabilities when selling qualifying property and the proceeds from that sale are reinvested in like-kind properties. Sometimes referred to as a "Starker exchange" or erroneously as a "tax free exchange," it should be noted that taxes are really only delayed until the sale of the acquired property. However, with proper planning, taxes can be substantially reduced and potentially eliminated. 1031 Exchanges are reported on Form 8824 top |
| What is a “like kind” property? Can I exchange my income producing duplex for vacant land? Like kind property is any real property held for investment or for a productive use in a trade or business. Taxpayers are permitted to exchange income producing property for vacant land and vice versa. An exchange can also be used to consolidate investments (proceeds from several properties can be used to purchase a single property) or to diversify investments (proceeds from the sale of a single property may applied to purchase several others). Like-kind is sometimes mistakenly thought to mean that only vacant land can be exchanged for for another piece of vacant land. Like-kind does require that the type of property being exchanged be similar, but on a different level. For instance, only real estate can be exchanged for real estate, bull dozers can only be exchanged for bull dozers, taxi cabs can only be exchanged for other taxi cabs and office equipment can on be exchanged for other office equipment. top |
| Why should I do an exchange? A tax deferred exchange transaction structured under the IRS Code Section 1031 is not for everyone and RGLLAW advises all individuals contemplating a tax-deferred exchange to consult with their individual tax counsel. When properly executed by an experienced, professional qualified intermediary, an IRC 1031 tax deferred exchange allows the taxpayer or Exchanger to retain the use and benefit of their equity while postponing and potentially eliminating their tax burden. top |
| Why can't I sell my property and simply purchase another with the proceeds? The IRS Code requires that the transaction be structured as exchange as opposed to a sale, to prevent tax consequences. The exchange came about originally for use with business equipment and was subsequently applied to real property. According to the IRS code, a distinguishing aspect of an exchange is that the Exchanger never has actual or constructive receipt of the proceeds from the sale. So if you were to simply sell one property and purchase another the transaction would require the payment of taxes on the taxpayer's capital gain. top |
| What or who is a "qualified intermediary?" A "qualified intermediary" is the name given to the entity that steps into the shoes of the Exchanger for the purpose of effecting a tax deferred exchange. The qualified intermediary contracts with the Exchanger to act on his or her behalf for the sale of the relinquished property and subsequent purchase of up to three replacement properties. The IRC imposes certain restrictions on just who can take on this responsibility and distinguishes intermediaries as qualified or not based upon the amount of independence the intermediary has from the Exchanger. If the intermediary is not qualified, then Exchanger will probably be found to have constructive receipt of the proceeds and will likely incur a tax consequence as a result of the sale. |
| How long do I have to find my replacement property? The Exchanger has 45 days from the close of the sale of the relinquished property to identify and notify the Qualified Intermediary in writing, of possible replacement properties. The Exchanger must complete the purchase of up to three replacement properties 180 days after the close of the relinquished property. There are three rules that limit the number of properties that can be identified. The taxpayer must meet the requirements of at least one of these rules:
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| Do I have to acquire a property of equal or greater value? To accomplish a total tax deferral, the property you acquired by the Exchanger should be equal or greater in value, debt, and equity. If your replacement property is lesser in any of these areas, you will have a tax liability on the difference referred to as "boot" by the IRS. top |
| When do I have to set-up my exchange? Once the relinquished property has gone to contract, the Intermediary should be contacted to set up the exchange account. Under no circumstance can the relinquished property close before the exchange agreement has been signed. top |
| What is a reverse exchange? A reverse exchange is when the Exchanger wishes to acquire replacement property before disposing of the relinquished property. The reverse exchange is very complex and much more expensive as the qualified intermediary must hold title of the replacement property until the Exchanger has disposed of a relinquished a property, thereby incurring extra transaction and recording fees. top |
| Where can I go to obtain legal advice on this issue? The material on this web site represents general legal advice. Since the law is continually changing, some provisions may be out of date. It is always best to consult an attorney about your legal rights and responsibilities regarding your particular case. If you believe you need legal advice, call your attorney. If you do not have an attorney, please contact rgllaw® by e-mail or by phone at 727-647-3700. Or call The Florida Bar Lawyer Referral Service at 1-800-342-8011, or the local lawyer referral service or legal aid office listed in the yellow pages of your telephone book. top |
For personalized answers to your specific situation please contact Bob by e-mail or by phone at 727-647-3700.
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© Copyright 2011-2004, Robert G. Lowe, PL, all rights reserved. "Robert G. Lowe, PL" and rgllaw® are trademarks for legal services. This site was last updated August 2011. |