Qualify a Trade as a 1031 Exchange
When Section 1031 came into the tax code in 1921, all exchanges were required to be structured as simultaneous trades. However, in the past 35 years, many new types of exchanges have been created.
Many companies believe they are correctly exchanging property only to discover that they fail one or more elements of the exchange requirements. The crucial difference is the IRS’s interest in raising tax revenues.
This is made more critical in light of the February 15, 2011 US Tax Court Case Ralph E. Crandall, Jr., et al. v. Commissioner. The court upheld that failure to adhere to the technical requirements of Section 1031 caused the sale of property to be taxed, regardless of the intent of the taxpayers to treat the sale as a tax deferred sale under Section 1031.
There are two separate ways to qualify as a simultaneous exchange:
Easy Wary. Enter into a Master Exchange Agreement with an Exchange Company qualified to exchange multiple assets continuously (CMAES) at any time during the year; [ Easy Way] or
Hard Way.If no Exchange Company is used then all of the following conditions must be met for every exchange: [ Hard Way ]
Title or possession of the replacement asset can never be received by the Company prior to transfer of title to the property to be sold.
NOTE: This requirement conflicts with the practical business necessity for many reluctant trucking businesses to surrender their trucks before receipt of replacement trucks to avoid losing profit.
- Title and possession of the replacement asset must be exchanged simultaneously (i.e., at the same time) with transfer of title to the property to be sold. Any delay in the exchange will cause the transaction to be taxed.
- Many companies are unaware that back dating, altering dates and altering documents is a criminal tax felony.
- The contract between the dealer and the taxpayer must reflect that the transaction is a like-kind exchange. Otherwise, it will be taxable.
- The exchange of assets must be within the same asset class as provided by the IRS.
- The asset given up and the asset received must come from the same company or parties. If the dealer uses two companies, one to receive used equipment and a finance company to sell new equipment, the transaction will be taxable.
- Cash, credit or financial allowances not placed in a qualified escrow account will cause the transaction to be taxable.
- The dealer is disqualified to act as the Exchange Company.