1. What is a 1031 tax-deferred exchange?
In a typical transaction, the property owner is taxed on any gain realized from the sale. However, through a Section 1031 Exchange, the tax on the gain is deferred until some future date. Section 1031 of the Internal Revenue Code provides that no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business, or for investment. A tax-deferred exchange is a method by which a property owner trades one or more relinquished properties for one or more replacement properties of "like-kind", while deferring the payment of federal income taxes and some state taxes on gain on the transaction. The theory behind Section 1031 is that when a property owner has reinvested the sale proceeds into another property, the economic gain has not been realized in a way that generates funds to pay any tax. In other words, the taxpayer's investment is still the same, only the form has changed (e.g. vacant land exchanged for apartment building). Therefore, it would be unfair to force the taxpayer to pay tax on a "paper" gain. For real estate, the like-kind exchange under Section 1031 is tax-deferred, not tax-free. When the replacement property is ultimately sold (not as part of another exchange), the original deferred gain, plus any additional gain realized since the purchase of the replacement property, is subject to tax.
2. What are the benefits of using a 1031 exchange?
A Section 1031 exchange is one of the few techniques available to postpone or potentially eliminate taxes due on the sale of qualifying properties. By deferring the tax, you have more money available to invest in another property. In effect, you receive an interest free loan from the federal government, in the amount you would have paid in taxes. You can acquire and dispose of properties to reallocate your investment portfolio without paying tax on any gain.
3. Who qualifies for the 1031 exchange?
If you are an owner of investment property you may be able to take advantage of this law and save on the state and federal capital gains taxes associated with the sale of your investment property. Individuals, C corporations, S corporations, partnerships (general or limited), limited liability companies, trusts and any other taxpaying entity may effectuate a 1031 exchange.
4. What are the requirements for a 1031 exchange?
Qualifying Property - Certain types of property are specifically excluded from Section 1031 treatment: property held primarily for sale; inventories; stocks, bonds or notes; other securities or evidences of indebtedness; interests in a partnership; certificates of trusts or beneficial interest; and choses in action. In general, if property is not specifically excluded, it can qualify for tax-deferred treatment.
Proper Purpose - Both the relinquished property and replacement property must be held for productive use in a trade or business or for investment. Property acquired for immediate resale will not qualify. The taxpayer's personal residence will not qualify.
Like-Kind - Replacement property acquired in an exchange must be "like-kind" to the property being relinquished. All qualifying real property located in the United States is like-kind. Personal property or Business assets that are relinquished must be either like-kind or like-class to the personal property which is acquired. Property located outside the United States is not like-kind to property located in the United States but is like-kind to property outside the United States.
Exchange Requirement - The relinquished property must be exchanged for other property, rather than sold for cash and using the proceeds to buy the replacement property. Most deferred exchanges are facilitated by Qualified Intermediaries, who assist the taxpayer in meeting the requirements of Section 1031.
5. What types of property do not qualify for a 1031 exchange?
Stocks, bonds, partnership or LLC interests, personal residences and stock in trade or inventory.
6. What types of property qualify for a 1031 exchange?
Qualifying use property is property that has been or will be held for income production (rental), investment or used in a trade or business. Your personal residence is not qualifying use property and does not qualify for 1031 exchange treatment, although it may qualify for Section 121 Exemption treatment. Assuming the property satisfies the qualified use test, the property must also satisfy the "like-kind" test. Real property is "like-kind" to real property, so as long as you are exchanging real property for real property it will qualify as "like-kind" for 1031 exchange treatment. Among the types of real property that are eligible for 1031 exchange treatment are raw land, single-family homes, hotels, multifamily dwellings, factories, commercial office buildings, shopping centers, farmland, leases of 30 years or more, quarries and oil fields. In general, any type of real estate may be traded for another type of real estate as long as it satisfies the qualified use test. "Like-kind" rules for personal property or business assets are more restrictive than those for real property. Aircraft, automobiles, trucks, office equipment, furniture, machinery, computers, musical instruments, billboards, franchise licenses, television licenses, copyrights, collectibles and oil and gas drilling equipment are just a few examples of personal property that qualify for 1031 exchange treatment. It is important to consult with your legal and tax advisor to determine whether your property will satisfy the qualified use and like-kind tests, especially in the areas of personal property, business assets and collectibles 1031 exchange transactions.
7. Are section 1031 exchanges limited only to real estate?
No, any property that is held for productive use in a trade or business, or for investment, may qualify for tax-deferred treatment under Section 1031. In fact, many exchanges are "multi-asset" exchanges, involving both real property and personal property or business assets.
8. How do I identify exchange property?
Under Regulations issued by the Internal Revenue Service for IRC §1031 tax-deferred exchanges, there are stringent requirements regarding identification of replacement property. These requirements must be met before the expiration of 45 days from the date you relinquished your exchange property. Identification of all replacement property must be made in writing, must be signed by you, and must be delivered to us on or before the 45th day. You may not identify replacement property after the 45th day. You may identify as many as three properties, regardless of their total value (the "3-property rule"), or you may identify any number of properties provided their aggregate fair market value on the 45th day does not exceed 200% of the aggregate fair market value of all your relinquished property on the date of its transfer (the "200% rule"). If you stay within these rules, you do not need to acquire all the property you identified. There are serious consequences if you do not stay within either of these rules. We recommend that you follow the 3-property rule, and identify either two or three properties, so that if the closing on your preferred property fails for any reason, you will have made a timely identification of one or two alternate properties which may be acquired instead. You may identify any type of investment or business property, single family rental, duplex, apartment building, hotel, office building, warehouse, commercial building, vacant land, etc. You may identify property in any State of the United States. Your identification must be specific as to what you intend to purchase. For example, if you intend to purchase only a percentage interest in a piece of property, you must identify it as "____% interest in ..". If you intend to construct improvements, you must describe specifically what improvements you intend to make, in addition to listing the address or legal description of the property where the improvements will be located. There are restrictions on acquiring property from related persons. If you plan to do so, please call us.
9. Is there any limit to the number of properties that can be identified?
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. See Exchange Rules.
10. What are the specific timing rules for an exchange?
The Exchanger has a maximum of 180 days from the closing of the relinquished property or the due date of that year's tax return, whichever occurs first, to acquire the replacement property. This is called the Acquisition Period. The first 45 days of that period is called the Identification Period. During the 45 days, the Exchanger must identify the property which will be used for replacement. The identification must be in writing, signed by the Exchanger, and received by the facilitator or other qualified party, faxed, postmarked or otherwise identifiably transmitted (such as Federal Express or other dated courier service). Failure to accomplish this identification within the 45 day period will cause the exchange to fail. All States 1031 Exchange Facilitator, LLC will guide you through all the technical details of the exchange process.
11. How long must a property be held before I can do a 1031 exchange?
Internal Revenue codes and regulations do not state a specific time that property must be held for a Section 1031 exchange. The most important issue is the intent of holding and not the period of holding. The property must be held for "use in a trade or business or for investment" and exchanged for like property. Your question would involve what amount of time is necessary for property to be considered held for such purpose. It is clear from IRS rulings that if property is acquired specifically to make an exchange, it is not held for the required purpose, regardless of the time it is held.
12. Can I exchange unimproved real property for improved real property?
Yes. Improved real property is like-kind and can be exchanged for unimproved real property and vice versa. Real estate is like-kind to real estate so long as it is held for productive use in a trade or business or for investment purposes.
13. If my property is in one state, can I trade it for a property in another?
Yes, 1031 exchanges are applicable anywhere in the United States, but be advised, some states have special rules affecting exchanges in their state only.
14. Can I acquire more than one piece of property?
Yes, but quantity and value of your replacements must conform to the "identification rules."
15. Can I sell 2 properties to buy 1?
Yes, but the strict timing requirements begin from the moment you close on the sale of the first property.
16. Can I perform an exchange if I recently refinanced the relinquished property, and how long must I be in title to the replacement property before I can refinance it?
It is the position of the IRS that the effect of refinancing relinquished property shortly before an exchange allows an exchanger to receive cash which should be treated like boot (i.e. taxable). The logic behind the IRS' position is questionable. It is well established that an exchanger can encumber property without tax consequences. Furthermore, if property is encumbered and then transferred as part of a like-kind exchange, the regulations are clear that the transferor will recognize gain unless an equal or greater amount of debt encumbers the replacement property received in the exchange. Thus, from a before-and-after perspective the exchanger's liabilities will not be reduced as a result of a like-kind exchange. There appears to be no reason why an Exchanger cannot encumber property after the exchange, and there is no valid reason why the exchanger should wait before encumbering the same. The receipt of debt proceeds from a refinancing does not give rise to taxable income, and the fact that the debt proceeds are from replacement property obtained in a like-kind exchange should not alter this result. Accordingly, the Exchanger can defer the recognition of gains tax on the exchange, and immediately thereafter tap into the equity in the replacement property placing cash in his pocket.
17. If the replacement property is sold, how are the capital gains taxes calculated?
The capital gains tax is calculated the same as in any other sale, assuming that you have not converted it to residential use, and that you are not going to do another 1031 exchange. The trick here is to be able to establish the basis on the new property at the time of sale. The basis on the new property is the sum of the basis transferred from the old property, plus the difference between the sale price of the old relinquished property and the new replacement property, minus the deprecation on the new replacement property.
18. Who is involved in an exchange?
19. What are the other types of exchanges?
Single Property, Two/Three Party Exchange, Simultaneous, Deferred or Forward Exchange, Construction/Improvement Exchange, Leasehold Improvements Exchanges, Vacation Home Exchange, Mixed Use Property, Installment Sales. Contact us for all types of exchanges.
A state agency is not allowed to exchange one piece of property for another, but it can pay for one which is exchanged for another. An intermediary is then the receiver of both pieces of land as well as cash from the government and can make the exchange.
Under section 1033 of the tax code, if a taxpayer replaces property which has been condemned (for highway construction, etc.) or involuntarily converted with other similar property, the taxpayer may elect the non-recognition of gains provided that the amount received upon conversion exceeds the cost of the replacement property.
24. Will I ever have to pay the tax I defer in an exchange?
The deferred tax on an exchange will be due only when you sell the replacement property. If you hold the property until you die, through proper planning, your heirs can inherit the property at a “stepped up basis” and no capital gains tax is owed at that time. This is a great topic to discuss with your tax advisor and attorney!
25. What is a qualified intermediary, and why do I need one?
One of the ways the Internal Revenue Service will disallow a 1031 tax-deferred, like-kind exchange, re-characterize it as a taxable sale and subsequently assess a capital gains tax is by taking the position that the Exchanger received or could have received the sale proceeds from the disposition of the relinquished property (constructive receipt and/or actual receipt). Department of the Treasury Regulations specifically allow for the use of a Qualified Intermediary, also known as an Accommodator. As the Qualified Intermediary, Diversified Exchange Corporation will substitute in on behalf of the Exchanger as the seller or buyer, depending on which side of the transaction you are on, and hold the net sales proceeds from the sale of the relinquished property in a segregated Qualified Escrow Account until the replacement property transaction is ready to close. The Department of the Treasury Regulations contain certain safe harbor provisions that avoid the constructive or actual receipt issues when the Exchanger has retained and used a Qualified Intermediary. The Qualified Intermediary must be an independent entity who is not the Exchanger, an agent of the Exchanger, or a related party of the Exchanger and who enters into a written Like-Kind Exchange Agreement, Qualified Escrow Account Agreement and the Assignment, Acceptance, Notice and Direction to Convey documents. These 1031 tax-deferred, like-kind exchange agreements must limit and restrict the Exchanger's rights to the exchange funds from the sale of the relinquished property. It directs the Qualified Intermediary to acquire the relinquished property from the Exchanger, transfer it to the buyer, acquire the replacement property from its seller and transfer it to the Exchanger.
26. Can I use my own attorney, accountant or real estate agent to be my intermediary?
No. The IRS states that if you have used your Attorney or Accountant within 2 years of your exchange they are disqualified from acting as your intermediary.
27. What is "boot"?
Boot is defined as any Non-Like-Kind property received by the Exchanger in the exchange and it is taxable.
Cash Boot: Cash Boot consists of any funds received by the Exchanger, either actually or constructively. If an Exchanger does not spend all of the proceeds from the sale of the relinquished property, he/she will have actual receipt of the balance not spent and pay taxes on that amount.
Mortgage Boot or Debt Relief: Mortgage Boot occurs when the Exchanger does not acquire debt that is equal to or greater than the debt that was paid off, therefore, they were relieved of debt. If the Exchanger does not acquire equal or greater debt on the replacement property, they are considered to be relieved of debt, which is perceived as taking a monetary benefit out of the exchange. Therefore, the debt relief portion is taxable, unless offset by adding equivalent cash to the transaction. So an Exchanger must buy of equal or greater value while spending the NET (after costs) equity. It is absolutely acceptable to take cash out of the exchange and pay taxes on that amount only.
**IMPORTANT: If the Exchanger wants cash out of the PHASE I exchange, the Intermediary must be notified immediately. The cash out must come directly out of the closing of Phase I and not from the Intermediary. Once the exchange equity is in the Qualified Escrow Account at the Intermediary's, the Exchanger cannot access the funds until the end of the exchange.
28. What is a "multi-asset" exchange?
A multi-asset exchange involves both real and personal property. For example, the sale of a hotel will typically include the underlying land and buildings, as well as the furnishings and equipment. If the taxpayer wants to exchange the hotel for a similar property, he would exchange the land and buildings as one part of the exchange. The furnishings and equipment would be separated into groups of like-kind or like-class property, with the groups of relinquished property being exchanged for groups of replacement property. Although the definition of like-kind is much narrower for personal property and business equipment, careful planning will allow the taxpayer to enjoy the benefits of an exchange for the entire relinquished property, not just for the real estate portion.
29. Can I sell individually owned property to purchase through an entity?
No, unless a disregarded entity is involved. IRC § 1031 provides that no gain or loss will be recognized on the exchange of property held for productive use in a trade or business or for investment if the property is exchanged solely for property of a like kind which is to be held either for productive use in a trade or business or for investment (a so called "qualified use"). If the exchanging investor changes the form of ownership of the property contemporaneously with the exchange, the IRS argues that the investor held the property primarily to dispose of it (a nonqualified use) rather than for productive use in a trade or business (a qualified use). Certain entities with a single owner, such as a single member LLC, are "disregarded" as an entity separate from its owner. The IRS has recently ruled that a transfer of replacement property directly to a single member LLC owned by the investor did not disqualify the transaction from the non-recognition rules of IRC §1031 even though title to the relinquished property was held in the name of the investor. The IRS correctly reasoned that because the single member LLC is a disregarded entity, the exchange in question would be viewed as if the investor itself had directly received the replacement property, thereby satisfying the requirements of IRC §1031.
30. Can I offer an exchange to my lender in lieu of foreclosure?
Theoretically, yes, however it is still likely that there is a taxable capital gain and depreciation recapture even if there is no remaining equity. Because there are several complexities to consider, it is best to consult your CPA or tax advisor.
31. Are partnerships allowed to do exchanges?
Yes, however, the Code is clear that individual partners may not exchange their partnership interest for another partnership interest or for real property.
32. If the replacement property is a rental now, how long does it have to remain a rental before it can be converted into a primary residence?
This is probably our most popular question, as many exchangers purchase replacement property in a vacation haven, with an eye towards using such property exclusively for their own personal use. The answer is that there is no hard and fast rule, but a subsequent conversion should not prevent the exchange from satisfying the use requirements provided that the exchanger did not have a concrete intention to convert the property to personal use at the time of the exchange. Although the preceding sentence is the legally correct answer, most clients want defined time frames. For the most conservative, we recommend two (2) years, as the IRS has ruled that a two-year minimum rental period was sufficient to meet the qualified use test. For an aggressive client, we explain the pitfalls of a negligible rental period under the intent standard, and typically urge such a client to rent the property for at least one season. You should be aware, however, that if you acquire property in a like-kind exchange to which Code Sec. 1031 applies, the $250,000/$500,000 exclusion that applies to gain realized on the sale or exchange of a principal residence under Code Sec. 121(a) does not apply to the sale or exchange of that property if the sale or exchange occurs during the five-year period beginning with the date of the acquisition of the property.
33. How are the exchange funds protected?
Many qualified intermediaries provide little or no security for your funds. SPEX/All States 1031 protects your funds with a fidelity bond and E&O insurance. Furthermore, Exchanger proceeds are wired into a dual signatory account that requires the Exchanger's signature before funds can be withdrawn.
34. Do I have to spend all of the proceeds from my relinquished property on replacement property?
No you do not, however you will be taxed on the amount you don’t spend. Unused proceeds are known as "boot" and are taxed on their face value.
35. If I don't spend all my proceeds when can I receive the unused amount?
You can receive unused proceeds at any time after you have acquired each one of the properties identified in your 45 day identification. If you do not acquire all of the properties identified in the 45 day identification, then the unused proceeds cannot be released until the earlier of the due date of your tax return including extensions, or 180 days after the closing of the sale of the relinquished (exchange) property.
36. Must a property be located in the United States to be a valid exchange?
Real property outside the United States and real property located within the United States including some of the U.S. territories are no longer considered like-kind. You should check with either an attorney or an accountant to define which territories may qualify for 1031 exchanges. However, Non-U.S. property can be like-kind to other Non-U.S. property
37. What are the fees for a 1031 exchange?
The fees charged by SPEX/All States 1031 vary based on the type of exchange and number of properties involved. Contact us with the specifics of your proposed exchange and we will tell you our fees.
39. How do I report my exchange on my tax return?
1031 exchanges are reported on IRS Form 8824. SPEX/All States 1031 offers a service for preparing Form 8824. Contact us and learn more about this service.
40. If you have already signed a sales contract, is it too late to effectuate a 1031 exchange?
Until title has passed to the buyer and money has been received, it is not too late to set up an exchange. SPEX/All States frequently receives calls from investors at the closing, asking us to prepare the necessary paperwork to get the exchange in motion.
41. Can I do an exchange if I use my property partially as a residence and partially as a rental property?
Yes. In such an exchange, allocation of value between the two types of property becomes important. For example, if an Exchanger owns a three family house occupying one floor as a personal residence, the allocation may be by the respective square footage, the number of units, the quality of interior improvements, or by appraisal. Any reasonable allocation is permissible. The gain attributable to the personal residence may be eligible to be excluded under IRC § 121.
42. Must the names on the deeds be the same for both the relinquished property and the replacement property?
Yes, unless a disregarded entity is involved. IRC § 1031 provides that no gain or loss will be recognized on the exchange of property held for productive use in a trade or business or for investment if the property is exchanged solely for property of a like-kind which is to be held either for productive use in a trade or business or for investment (a so-called "qualified use"). If the exchanger changes the form of ownership of the property contemporaneously with the exchange, the IRS argues that the exchanger held the property primarily to dispose of it (a nonqualified use) rather than for productive use in a trade or business (a qualified use). Certain entities with a single owner, such as a single member LLC, are "disregarded" as an entity separate from its owner. The IRS has recently ruled that a transfer of replacement property directly to a single member LLC owned by the exchanger did not disqualify the transaction from the non-recognition rules of IRC §1031 even though title to the relinquished property was held in the name of the Exchanger. The IRS correctly reasoned that because the single member LLC is a disregarded entity, the exchange in question would be viewed as if the exchanger himself had directly received the replacement property, thereby satisfying the requirements of IRC §1031
43. Will an exchange increase my chances of an audit?
Not likely. There is no reported study that a 1031 exchange increases the exchanger's odds of being audited. Furthermore, since tax free exchanges are specifically authorized by statute, an Exchanger would have nothing to fear from an audit if the exchange is structured correctly.
44. What happens if I can't acquire the properties I identify?
If an Exchanger cannot acquire identified property, the exchange funds will be returned to the Exchanger, and the Exchanger will recognize the gain realized on the sale of the relinquished property. The timing of the payment of the exchange funds, however, sometimes creates a problem. The regulations under Section 1031 allow a payment of money to the Exchanger upon the earliest to occur of three events: (1) the end of the 180-day exchange period; (2) the end of the 45-day identification period if the Exchanger has no remaining unacquired identified replacement properties; or (3) where there are remaining unacquired identified properties at the end of the identification period, then on (a) receipt of all properties that an Exchanger is entitled to receive under the exchange agreement, or (b) the occurrence of a "material and substantial contingency that relates to the deferred exchange," that is provided for in writing, and that is beyond the control of the Exchanger or any disqualified person. Many qualified intermediaries take the position that the exchange funds can never be returned prior to the 45-day identification period, and after 45-days only if the Exchanger provides the qualified intermediary with a letter stating from a third party (e.g. an attorney or engineer) that the identified property cannot be purchased due to a material and substantial contingency.
45. Does SPEX/All States 1031 provide the earnest money deposit with respect to the replacement property?
SPEX/All States 1031 should provide the earnest money deposit, but only after the purchase and sale agreement for the replacement property is assigned to SPEX/All States 1031. Furthermore, the agreement should provide that if it is cancelled, the deposit will be returned to SPEX/All States 1031. If the Exchanger advances the deposit, the Exchanger will not be reimbursed by SPEX/All States 1031 until after the Exchanger has received the replacement property in order to avoid a violation of the regulations.
46. What costs on the settlement statement can be deducted from the exchange proceeds?
With regard to selling expenses, the IRS has ruled that cash received by an Exchanger is offset by commissions paid. It is the opinion of the American Bar Association ("ABA") that the principles contained in the IRS' ruling concerning commissions should be extended to all selling expenses typically deducted by a seller in a taxable sale under Section 1001, or capitalized by a buyer and added to the basis of the property acquired under Section 1012. Such expenses typically included commissions, finder's fees, inspection and testing fees, recording fees and legal fees. Loan fees, points, loan application fees, mortgage insurance, lender's title insurance, and other costs related to the acquisition of a loan for the replacement property are typically not treated as selling expenses because these costs generally are treated as part of the cost of obtaining a loan rather than the cost of obtaining the property, and do not increase the basis of the replacement property. Therefore, if loan related expenses are paid out of the exchange, they should constitute taxable boot in the form of cash received by the exchanger.
47. What options are available if I currently own an interest in a partnership?
Exchanges of partnership interests generally do not qualify for non-recognition treatment under IRC § 1031. Therefore, when partners want to end their relationship, they cannot each exchange out of their partnership interests into another partnership interest or real property under IRC § 1031. Such transactions can be structured as exchanges, however, by converting the partnership interest into a real property interest. The various structures include partnership split-ups, buy-outs and formations. All such structuring is not without tax risk, and requires the advice of an experienced tax professional.
48. Do I need the cooperation of my buyer and seller to do the exchange?
Not necessarily. The regulations only require that the buyer and seller be given notice of the exchange. All States prepares a "Notice of Assignment" which provides the required notice. Although cooperation is not required, SPEX/All States 1031 recommends that the purchase and sale agreements for both the sale and purchase of real estate contain language requiring other parties to cooperate (provided they incur no additional cost) because it prevents a suddenly reluctant party from pointing to the 1031 exchange as a reason to not go forward.
49. Do I have to find someone to swap properties, in order to effectuate a tax free exchange?
In order to accomplish a tax free "exchange", clearly there must be an exchange of properties. That doesn't mean, though, that you sit down with another property owner and just trade deeds. It would be virtually impossible to find another person with investment property of identical value who wants to make a swap. In 1984, Congress enacted legislation to allow deferred exchanges, meaning that an investor could sell property to an unrelated buyer, after having entered into an exchange agreement with a qualified intermediary, and then identify any like-kind property within certain timeframes.
50. Do I have to buy raw land, if I sell raw land?
As used in IRC § 1031(a), the words "like-kind real property" refer to the nature or character of the property and not to its grade or quality. The fact that any real estate is improved or unimproved is immaterial for the fact relates only to the grade or quality of the property and not to its kind or class. In other words, all US real estate (no matter what the form) is like-kind real property and improved real estate may be exchanged for unimproved real estate; city real estate may be exchanged for a farm, Massachusetts real estate may be exchanged for Ohio real estate, etc.
51. Do I have to sell and buy on the same day?
No. The tax code allows for "deferred like-kind exchanges." In a deferred like-kind exchange, the investor sells his or her real estate ("Relinquished Property") to any unrelated buyer, and then has forty-five days to find ("identify") property they wish to buy ("Replacement Property"). Although the Replacement Property must be identified within 45 days, the investor has the lesser of one hundred eighty (180) days or the due date of its tax return for the year of the sale (which such return can be extended) from the sale of the Relinquished Property to close on the Replacement Property.
52. Are 1031 exchanges difficult?
Entering into a 1031 exchange with an experienced qualified intermediary, such as SPEX/All States 1031 Exchange Facilitator, LLC, couldn't be easier. The investor simply contacts SPEX/All States 1031 and executes an exchange agreement. After that, the investor proceeds as if there is no exchange conducting its own investigations and negotiating with other parties, eventually assigning the executed purchase and sale agreement to SPEX/All States 1031 who then steps in the shoes of the investor at the closing. The experienced staff at SPEX/All States 1031 will contact the closing attorney to ensure that the closing complies with the requirements of the Code and Regulations.
53. Does my attorney hold the sales proceeds in escrow while I look for a replacement property?
No. Regulations specifically exclude the investor's agent, broker, attorney, accountant, most family members and others with a relationship with the investor. The investor should use a well-established intermediary that has instituted financial safeguards to protect the sales proceeds during the exchange. SPEX/All States 1031 requires dual signatures to transfer funds (both the investor and SPEX/All States 1031 must sign before funds are transferred).
54. Are 1031 exchanges only for the big investors?
No. Actually, anyone who owns investment property should consider a §1031 exchange before selling. Whether they are selling a small rental unit or an office building, they can simply pay the gain and throw away their hard earned money, or effect a §1031 exchange preserving their capital. Any investor should consult a tax adviser who is familiar with §1031 exchanges to determine the most beneficial strategy.
55. If my closing is tomorrow, is it too late to do an exchange?
No. Until title has passed to the buyer and money has been received, it is not too late to set up an exchange. SPEX/All States frequently receives calls from investors at the closing, asking us to prepare the necessary paperwork to get the exchange in motion.
56. What is a commingled account?
A commingled account is essentially a single account in the name and taxpayer identification number ("TIN") of the qualified intermediary that contains all of the funds of the intermediary's 1031 exchange clients. A qualified intermediary that commingles the funds of its clients typically uses basic, internal accounting methods to keep track of each client's deposits and withdrawals, while setting itself up as the sole signatory of the commingled account.