A 1031 exchange refers to Section 1.1031 of the Internal Revenue Code which was passed in 1990. Normally, when you sell all real and personal property, the tax code requires the payment of the Capital Gains Tax. That is to say, when you sell your office for $100,000 more than you bought it for, you must pay the gains upon those earnings. However, after the passing of a 1031 Exchange that is no longer necessarily the case.
What types of Property Qualify?
A 1031 Exchange allows sellers of some real and personal property the opportunity to avoid paying capital gains taxes (which are 15% plus state taxes) by “exchanging" their sold property for newly purchased property. However, certain restrictions apply. The most important restriction is that only business property and investment property applies. So, an exchange under a purely residential home does not qualify, whereas exchanging a property that your business has used for its office, or even one used simply for investment diversification does.
But simply selling your office isn’t enough to qualify you for a 1031 exchange. Rather, the code also requires that that you simultaneously buy a property of “like-kind." This does not mean that if you are selling a 2000 sq. ft. office you must buy a 2000 sq. ft office. Rather, the term is interpreted very loosely to mean virtually any real estate held for productive use in a business or for investment, whether improved or unimproved can be exchanged for any other property to be used for productive business or investment purposes. So, if you sell and unimproved lot of land and purchase an improved one or visa versa, this still qualifies, just as selling industrial property and buying rental resort property does. The point here is that while “like-kind" is an important restriction, it has been interpreted so broadly as to give individuals a lot of free reign.
The Exchange
When most owners envision a 1031 exchange they envision a provision whereby they must buy and sell the two properties on the same week or even the same day. But that is not the case. A tax-deferred 1031 exchange allows up to 180 calendar days between the sale of the first property and the purchase of the second. But no matter the time between sale and purchase, a 1031 exchange is required by the Internal Revenue code to have a “qualified intermediary" to manage the exchange.
A Qualified Intermediary
The requirement of a qualified intermediary is intended primarily to prevent individuals engaged in the exchange from using the time in between the sale and purchase of property to their financial gain. Although the seller has up to 45 days to set up the intermediary, the exchange is designed so that the seller should not profit from the use of the money before the purchase of the new property is made. An intermediary serves the judicial purpose of ensuring this. But it is important to remember that the qualified intermediary charges fee for this. While these services can vary in cost depending on the additional advisory services provided by the Intermediary, individuals interested in a 1031 exchange should expect to pay somewhere in the vicinity of $500 to $700 for the first exchange and $200 to $400 for each additional property.
TIC: Qualified Intermediaries are usually referred to as 1031 Exchange Accommodators by anyone engaged in real estate business and some even call them the 1031 Exchange Facilitator whose main functions are to complete the required legal documents so that all applicable laws as well as regulations and even rulings are complied with.
In fact, there are no doubts as to how important are the needs of assigning TIC: Qualified Intermediaries into each Sale and Purchase Agreement or Contract and also Escrow instructions because when they are present before concluding the sale or purchase of the TIC interests it would help qualify the transaction as 1031 exchange. The fact of the matter is that when a transaction is closed without using TIC: Qualified Intermediaries, it would risk being disqualified from 1031 exchange treatment.
Receives The Proceeds From The Transaction
In fact, besides stating beforehand that you are actually engaging in 1031 exchange, you also need to use TIC: Qualified Intermediaries to receive the proceeds from the transaction at close and who will also hold onto the money until the close of the transaction in order to qualify for 1031 exchange. Furthermore, using such intermediaries could involve either individuals or entities and they are in fact the middlemen in any exchange who provide oversight, do the paperwork, deal with escrow services as well as provide necessary expertise that will assure that the exchange will in fact qualify as 1031 exchange under the Internal Revenue Code's Section 1031.
Since any 1031 exchange is sure to be a complicated process it is always a good idea to use TIC: Qualified Intermediaries to simplify the process that in fact will then feel just like any normal transaction. Of course, you will need to pay fees for using the services of the TIC: Qualified Intermediaries and in fact the Qualified Intermediaries industry has not been too closely regulated which means that you would need to exercise special care so that you only select the best and most reputable TIC: Qualified Intermediaries to handle your transaction.
If you need help in finding suitable TIC: Qualified Intermediaries, you could always check out 1031 Exchange Place where a complete database related to the names and addresses of different TIC: Qualified Intermediaries from all parts of the United States is maintained. Once you have selected some prospective TIC: Qualified Intermediaries, you will then need to look at their reputation, how well they bond with you, and how competitive their fee schedule is as well as how their financial strengths are.
Needless to say, you would be best served if you chose only that TIC: Qualified Intermediaries who have the required level of expertise in the 1031 exchange industry.
Both Dan Johnson & Kathryn Landry are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
Dan Johnson has sinced written about articles on various topics from tax, Finances and Bankruptcy Law. Dan Johnson enjoys writing about 1031 exchange. Visit/ to learn more.. Dan Johnson's top article generates over 8100 views. to your Favourites.
Kathryn Landry has sinced written about articles on various topics from tax, Investments and Tax. Kathryn R. Landry is a business writer for TIC Advisors, Inc . A company that can give you the most complete information on a or. Kathryn Landry's top article generates over 8100 views. to your Favourites.