Question #1

If I am already in contract to purchase or sell is it too late to do an IRS 1031 like-kind tax-deferred exchange?

ANSWER:

No, we can still set up an exchange.

Question #2

After I closed the sale of my property can I still make it part of an exchange?

ANSWER:

If you received any sale proceeds, it's probably too late.
Ask your experienced Qualified Intermediary (QI) preferably before you close the sale.

Question #3

Do I need a Qualified Intermediary (QI)?

ANSWER:

Yes, unless you have the rare case of a direct 2-party swap, there will be a 4-party transaction, so (1) you find (2) a Buyer for the "relinquished" Property-1 that you plan to exchange for "replacement" Property-2 owned by a (3) Seller, and 1031 requires you enter into an “exchange agreement” with
(4) a QI (an independent facilitator not related to any of the others) providing for" mutually dependent transactions"—you transfer Property-1 to the QI (to open the exchange), QI’s sells it
to the Buyer, QI’s buys Property-2 from Seller with the sale proceeds, then QI’s transfers Property-2
to you (to close the exchange). Qualified 1031 exchanges result in the non-recognition of taxable gain as distinct from a taxable sale then a purchase with after-tax dollars. 

Question #4

Can I use a family member to be my Qualified Intermediary?

ANSWER:

No, the Internal Revenue Code (IRC) says that it must be an independent non-related individual.
You, as taxpayer/seller; your agent; and anyone who (within a two-year period of the exchange transaction) acted as your real estate agent, broker, attorney, accountant, CPA, investment or financial advisor or broker are "disqualified" and cannot be your QI. Don’t try to do it yourself.

Question #5

Can I keep some of the sales proceeds?

ANSWER:

Yes, that’s called "boot", however, any proceeds that you keep are taxable to you as either capital gains or recapture of depreciation. But we have certain strategies for you if you need some money.

Question #6

What happens to the sale proceeds while I am looking for a replacement property?

ANSWER:

The QI sends your funds immediately to buy your replacement property,
otherwise the funds are “parked” in escrow.

Question #7

What do I need to know about doing a 1031 exchange? 

ANSWER:

Making an exchange part of your sale does not add much to the process. Your QI provides a proper 1031 "Exchange agreement", the 1031 “closing and wiring instructions” to the settlement agents of both the sale and the purchase, the necessary "1031 forms" to notify the buyer and seller. You will be provided the “deadlines calendar” (for 45-day replacement property "identification” or “ID” and its 180-day closing deadline), "ID forms" and "forms to authorize wiring" of your funds in the “escrowed exchange fund” (for purchase deposit and balance of price), copies of the documents, "IRS Form 8824" (to notify the IRS), a "disbursement of any remaining exchange funds" to you and a "final accounting". Your QI will keep you advised well in advance of every step to make it easy.

Question #8

Do I have to purchase what I identify?

ANSWER:

Yes, but not necessarily every property that you have identified.

Question #9

How do I identify property?

ANSWER:

We will give you "forms and procedures" for that purpose then you must mail, email, or
hand-deliver the signed, filled-out "identification forms" to us within 45 days of the sale
of your property to your buyer. 

Question #10

Can I "finance" some portion of the price on the property I am selling?

ANSWER:

Yes, you can take a note and mortgage, however, that can become taxable to you.
We strongly advise you to consult your accountant or tax advisor about this subject.

Question #11

Can I use exchange funds to build on property I already own?

ANSWER:

No, 1031 exchange proceeds can only be used to acquire replacement property from someone
other than you. You may, however, use such funds to build on the replacement provided
the construction is complete within the 180-day deadline to complete the exchange.

Question #12

Can I buy property from a relative?

ANSWER:

Yes, but there are certain rules that apply if you sell it before a period of time goes by.

Question #13

What happens if I cannot find a replacement property?

ANSWER:

If you do not identify any replacement properties before the expiration of the 45-day rule,
your exchange has failed, the tax deferral will be "disallowed” and your QI must refund
your escrowed sale proceeds, if any. In that event you are subject to pay the taxes on the gain
from the sale of the property.

Question #14

Will the QI let me back-date my property ID form after the 45 days?

ANSWER:

No, to do so would be tax fraud by you and the QI.

Question #15

Can I purchase a property to use personally?

ANSWER:

Only property "held for business or investment use" is "qualified" for a 1031 exchange. So, if the property will be held for your personal use and not rented out for a period of time, it will not “qualify” and the exchange will be disallowed. You could buy the property for legitimate business or investment purposes, use it for such purposes, then much later decide to "change"
its use to personal. And note that U.S. Code Section 121 allows a substantial exclusion of gain on the sale or exchange of your "Principal Residence" - check with your tax adviser.

Question #16

Can I purchase the property in another name?

ANSWER:

Change of ownership of title after the property has been sold, in almost all circumstances will disallow the exchange. If you know ahead of time that you want to do this, change the title well before the property is sold.

Question #17

Can I exchange stock that has appreciated in value?

ANSWER:

Not under Section 1031—it deals only with real estate.

Question #18

What does "like-kind" mean?

ANSWER:

Exchanging any kind of real estate used primarily for business/investment purposes with almost any other kind of real estate used primarily for business/investment purposes is considered “like-kind”. So you may exchange farm land for an industrial warehouse if each is used for business/investment purposes (even though they are certainly of very different character, because in the sense that each is used for business/investment purposes they are "like-kind" under 1031). But an investment rent house that may be exactly identical to your primary residence will not qualify as "like-kind". [Note that U.S. Code Section 121 allows a substantial exclusion of gain on the sale or exchange of your "Principal Residence" - check with your tax adviser.]

Question #19

Can I purchase an interest in a property?

ANSWER:

Yes, you can buy an undivided interest, also called a Tenant-in-Common interest (or TIC). These may often be larger real estate offerings perhaps with professional management in place and a solid return on investment (e.g., a Walgreens). You cannot however purchase an interest in a real estate investment trust (REIT) because that is considered a “security” like stock (i.e., not real estate).

Question #20

When can I start looking for a replacement property?

ANSWER:

You do not have to wait until the sale of your property to start looking, you may start any time
prior to the sale.

Question #21

Can you give me tax advice?

ANSWER:

We are certainly competent to do so but are NOT "allowed" because, as a Qualified Intermediary,
we must remain Independent or we become Dis-Qualified. You must secure legal or tax advice
from other advisors. We will, of course, keep you advised of the steps and rules that pertain to
your case, however, if we go beyond that your exchange could be disallowed.

Question #22

May I purchase foreign property?

ANSWER:

No, qualified replacement property is limited to only property located within
the fifty United States and the US Virgin Islands.

Question #23

What is a Section 1035 exchange?

ANSWER:

26 U. S. Code § 1035 or a "1035" exchange is a provision in the Internal Revenue Service code allowing for a tax-free transfer of an existing annuity contract, life insurance policy, long-term care product, or endowment for another one of like kind.  It has nothing to do with the 1031 exchange.

Question #24

Is there a "formula" to avoid taxable "boot"?

ANSWER:

To avoid tax on "boot" you could:

1. Purchase replacement property for not less than the relinquished property was sold less commissions and closing costs; and

2. Spend all cash proceeds from the relinquished property sale (the whole exchange fund) to acquire the replacement property.

Question #25

How much does a Qualified Intermediary charge?

ANSWER:

Our charges and practices are within current acceptable and reasonable industry standards. 
We currently charge a one-time easy to remember tax deductible set-up fee of less than $1,031, which includes one relinquished property closing and one replacement property closing with an additional fee of about $350 for each additional closing required in your tax-deferred exchange.

The one-time fee includes at no additional charge normal costs, service fees and charges
(e.g., for wire transfers, certified checks, express delivery, etc.) as well as expenses for
information transmission, DocuSign electronic signatures, data and AWS cloud document storage, archiving and block-chain security encryption.

Earnings (interest earned) in excess of $100 on escrowed exchange funds are typically
credited to you and we will, of course, issue complimentary “proof of funds” verification letters
to your designees, as required.