If the Exchanger actually or constructively receives any of the proceeds from the sale of their relinquished property, those proceeds will be taxable as "boot".
when the Exchanger is purchasing the replacement property from someone other than the buyer of their relinquished property). By becoming an actual party to the exchange, a reciprocal trade takes place even when there are three or more parties involved in an exchange transaction (i.e. This means the Exchanger must assign to a Qualified Intermediary (1) their interest as seller of the relinquished property and (2) their interest as buyer of the replacement property. The IRS stipulates that a reciprocal trade or actual exchange must take place in each IRC 1031 transaction. There are many exchange companies that can act as a Qualified Intermediary and perform several vital functions in an exchange. The use of a Qualified Intermediary, also known as an "Accommodator" or "Facilitator" is essential to completing an IRC 1031 Tax Deferred Exchange. The Exchanger is always advised to discuss the intended exchange with their legal or tax advisor. IRC Section 1031 does not apply to exchanges of stock in trade, inventory, property held for sale, stocks, bonds, notes, securities, evidences of indebtedness, certificates of trust, or beneficial interests or interests in a partnership. In the case of real property exchanges, the Exchanger must sell property that is held for income or investment purposes and acquire replacement property that will be held for income or investment purposes. The Exchanger can offset the amount of debt obtained on the replacement property by putting the equivalent amount of additional cash into the exchange. To avoid the payment of capital gain taxes the Exchanger should follow three general rules:(a) purchase a replacement property that is the same or greater value as is to the relinquished property, (b) reinvest all of the exchange equity into the replacement property and, (c) obtain the same or greater debt on the replacement property as on the relinquished property. After the 45 days has passed, the Exchanger may not change their Property Identification list and must purchase one or more of the listed replacement properties or the exchange fails! The purchase of the replacement property must be completed within 180 days after of the close of the relinquished property. This involves a written notification to the Qualified Intermediary listing the addresses or legal descriptions of the potential replacement properties. The Exchanger has 45 days from the date the relinquished property closes to "Identify" potential replacement properties.
The exchange funds are used by the Qualified Intermediary to purchase the replacement property for the Exchanger.Įxchanges must be completed within strict time limits with absolutely no extensions. The cash or other proceeds from the relinquished property are assigned to the Qualified Intermediary and are held by the Qualified Intermediary in a separate, secure account. The Exchanger and the Qualified Intermediary enter into an Exchange Agreement, which essentially requires that (a) the Qualified Intermediary acquires the relinquished property from the Exchanger and transfers it to the buyer by a direct deed from the Exchanger and, (b) the Qualified Intermediary acquires the replacement property from the seller and transfers it to the Exchanger by a direct deed from the seller.
In any exchange the Exchanger must enter into the exchange transaction prior to the close of the relinquished property. Two requirements must be met to defer the capital gain tax: (a) the Exchanger must acquire "like kind" replacement property and (b) the Exchanger cannot receive cash or other benefits (unless the Exchanger pays capital gain taxes on this money). By completing an excha nge, the investor (Exchanger) can dispose of their investment property, use all of the equity to acquire replacement investment property, defer the capital gain tax that would ordinarily be paid, and leverage all of their equity into the replacement property.
#Irc 1031 code#
The tax deferred exchange, as defined in Section 1031 of the Internal Revenue Code of 1986, as amended, offers real estate investors one of the last great investment opportunities to build wealth and save taxes.
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