What is Tax-Deferred Exchange?
Under Section 1031 of the Internal Revenue Code, owners of real estate held for investment
or use in a trade or business can swap their property tax-free for "like-kind"
real estate. Exchanges are made for people wanting to stay invested in real estate,
increase their leverage and to avoid paying hefty taxes upon the sale of property.
Like Kind
- Apartments
- Rental Houses
- Retail Properties
- Commercial
- Raw Land
- Office Buildings
- Industrial
- Ranches
Non Qualifying Properties
- Personal Residences
- Dealer Property
- Partnership Interests
- Inventory
Reason to Exchanges
- Restoring Depreciation that will soon expire - by exchanging one property for another
of greater value.
- To upgrade size and/or quality of investment. An exchange can be utilized to combine the
equity of one or more properties into a larger singular investment.
- To change investment location. An exchange can be executed in anticipation of market
trends to maximize appreciation potential.
Phoenix golf homes for sale.
7 Steps for a Successful 1031 Tax Deferred Exchange
Step 1: Consult with your tax and financial advisors to
determine if a tax deferred exchange is appropriate for your circumstances and compatible
with your investment goals.
Step 2: Listing the Relinquished Property for sale with a
licensed real estate broker. During the first step the Exchanger will list the
Relinquished Property with a real estate broker. The broker/agent will disclose the intent
to complete an exchange in the listing agreement. Phoenix golf
homes for sale.
Step 3:
Offer, Counter Offer and Acceptance. The
Exchanger enters into a contract with the Buyer for the sale/exchange of the Relinquished
Property. The broker/agent discloses the Seller/Exchanger's intent to exchange into the
Purchase Agreement and Receipt for Deposit.
Step 4:
Open escrow for the Relinquished Property and
coordinate with the Facilitator. The Facilitator prepares the exchange agreement and
coordinates with the escrow holder to close escrow as Phase I of a tax deferred exchange.
Important: The exchange agreement must be in place and signed by all parties prior to
close of escrow. Additionally, all earnest money deposits should be placed with the title
company.
Step 5: Replacement Property Identification. After
closing escrow for the sale of the Relinquished Property, the Exchanger must identify all
Replacement Property within 45 days from day after close of escrow.
Step 6:
Contracting for the Replacement Property. After
closing on the Relinquished Property the Exchanger has 180 days to acquire the Replacement
Property. With the help of his or her agent the Exchanger enters into contract to purchase
the Replacement Property from the Seller. In the contract to purchase the agent discloses
the Exchanger's intent to complete the exchange and obtains the Seller's cooperation.
Step 7:
Open escrow for the Replacement Property. The
Facilitator prepares the Phase II Exchange Agreement and coordinates with the Replacement
Property Escrow holder. The funds held in trust by the Facilitator are placed in escrow
and the Replacement Property is purchased by the Facilitator from the seller. The
Facilitator then transfers the Replacement Property to the Exchanger and the transaction
is closed as Phase II of a delayed exchange. Phoenix golf homes
for sale.
Identification of Replacement Property
Regardless of the number of relinquished properties transferred by the Exchanger as part
of the same exchange, the maximum number of replacement properties that the Exchanger can
identify is as follows:
3 Property Rule:
Three properties without regard to the
fair market values of the replacement properties.
- Or -
200 Percent Rule:
Any number of properties as long as
their aggregate fair market value as of the end of the identification period does not
exceed 200 percent of the aggregate fair market value of all the relinquished properties
as of the date the relinquished properties were transferred by the exchanger.
Exception
95 Percent Rule: Any number of replacement properties identified before the end of the
identification period and received before the end of the exchange period, but only if the
Exchanger receives before the end of the exchange period identified replacement property
the fair market value of which is at least 95 percent of the aggregate fair market value
of all identified replacement properties.
Glossary of Terms
Accommodator: A principal involved in the exchange
transaction who agrees to assist the exchanger to effect a tax-deferred exchange. Same as
Facilitator or intermediary.
Accommodating Party:
In an exchange of properties there is always a person or
entity that steps in to accommodate or facilitate the exchange transaction. Depending on
how the transaction is structured, the accommodating party may incur additional liability
in their efforts to assist in the exchange.
Acquisition Property:
Replacement property
