Detailed Exchange Information
• Aircraft
• Improvement
• Personal Property
• Real Property
• Reverse
• Cooperation Language & Forms
• Real Property Exchanges
• Personal Property Exchanges
• General Provisions
Detailed Exchange Information
Please see the following for further information:
• Aircraft
• Improvement Exchanges
• Personal Property
• Real Property
• Reverse Exchanges
• Cooperation Language & Forms
An Introduction to Real Estate Exchanges
Internal Revenue Code Section 1031 provides that capital gains taxes are deferred when business or investment real estate is exchanged, rather than sold. Under Section 1031, the exchange may be simultaneous or delayed. In a delayed exchange, the property the taxpayer ("Exchangor") desires to exchange is conveyed before the replacement property is acquired. To achieve favorable tax treatment, the structure of a delayed exchange must comply with the requirements of Section 1031, including the identification and acquisition of the replacement property within strict time deadlines, as discussed in more detail below.
A sale of business or investment real estate followed by reinvestment in real estate does not qualify as an exchange under Section 1031, and exchange transactions must be structured carefully to prevent characterization as a taxable sale and purchase. Regulations issued by the Internal Revenue Service provide detailed requirements for delayed and simultaneous exchanges under Section 1031.
Preferred Approach: The Qualified Intermediary
IRS Regulations provide a "safe harbor" procedure for delayed or simultaneous exchanges using a Qualified Intermediary as an independent party to acquire and convey each property involved in the exchange transaction. Experienced lawyers and other professional tax advisors agree that complying with the Qualified Intermediary "safe harbor" will insure that a delayed or simultaneous exchange will qualify for tax-deferred treatment under Section 1031.
The National 1031 Exchange Service (National 1031) will participate as a Qualified Intermediary anywhere in the United States. The participation of National 1031 in an exchange assures that the procedural requirements of Section 1031 and the IRS Regulations will be satisfied and that complications that could jeopardize favorable tax treatment will be anticipated and handled. In addition, National 1031 works with Exchangors and their tax advisors to accommodate special transactions, such as Reverse and Improvement exchanges.
The Role of the Qualified Intermediary
In a delayed exchange, after an Exchangor contracts to sell his or her property the Exchangor and National 1031 enter into a comprehensive exchange agreement detailing National 1031's obligations as a Qualified Intermediary. The contract to sell the Exchangor's property is assigned to National 1031 who completes the sale of the property to the buyer under the terms of the contract. Legal title to the property is conveyed directly to the buyer by the Exchangor.
Proceeds of the sale are paid to National 1031 and held in an institutional depository on behalf of the Exchangor. After the Exchangor identifies and contracts to acquire replacement property, the contract to buy such property is assigned to National 1031. National 1031 acquires the replacement property on the terms negotiated by the Exchangor using the proceeds from the sale of the Exchangor's property and, if necessary, with proceeds from a purchase money loan to the Exchangor and/or additional cash from the Exchangor. Title to the replacement property is deeded directly from the seller to the Exchangor.
Security of Exchange Proceeds
The security of funds and property held by the Qualified Intermediary is always a concern for Exchangors and their advisors. The principals of National 1031 have accommodated hundreds of exchanges for over a decade, involving properties valued in the hundreds of millions of dollars each year. Further, National 1031's clients are insured against loss from dishonest acts such as embezzlement, fraud and theft by a Fidelity Bond underwritten by the CNA Insurance Companies to a limit of $2,500,000 per occurrence. Finally, National 1031's procedures incorporate the most stringent of internal controls on the handling of client funds to ensure the greatest degree of both safety and confidentiality.
All exchange proceeds held by National 1031 are fully deposit insured by a combination of FDIC, SPIC and private insurance coverages. When requested, National 1031 will cooperate with an Exchangor and his or her advisors to make special arrangements to provide additional security for exchange proceeds held by National 1031 without jeopardizing the desired favorable tax treatment.
In addition, as a member in good standing of the Federation of Exchange Accommodators (FEA), National 1031 is obligated to adhere to the FEA's stringent Code of Ethics. The standards of conduct set forth by the FEA ensure all clients of National 1031 that their transactions are handled professionally and with the highest degree of integrity. Business, professional and financial references are also available upon request. Please refer to About National 1031 for more information on bonding, deposit insurance and our company.
Documentation
As Qualified Intermediary, National 1031 prepares the exchange agreement, assignments of contracts, closing instructions and other necessary documents for an exchange in compliance with the requirements of the IRS Regulations. All documents used by National 1031 have been drafted by experienced tax and real estate legal counsel, and are reviewed and updated regularly.
Independent Tax Advice
The IRS Regulations restrict a Qualified Intermediary from also acting as the Exchangor's tax advisor, lawyer or real estate broker. Further, because of the complexity inherent in many exchanges, it is often advisable that an Exchangor obtain independent professional advice from the Exchangor's lawyer, accountant or other tax advisor whether an exchange is appropriate for the Exchangor's situation. Upon request, National 1031 will provide referrals to professionals qualified to provide tax, legal and real estate brokerage advice.
Summary of a Delayed Real Estate Exchange
A delayed exchange transaction involving National 1031 as the Qualified Intermediary usually follows a common pattern:
- The Exchangor negotiates the sale of the property to be relinquished in the exchange, and enters into a real estate sales contract with the buyer.
- Prior to the closing of such sale, Exchangor engages National 1031 to prepare the necessary exchange documentation and coordinate with the closing or escrow agent on the preparation of settlement statements and other closing documentation.
- National 1031 prepares and provides the Exchange Agreement to the Exchangor for review and clarification of any terms and conditions, and prepares and sends written closing instructions to the closing or escrow agent.
- At the real estate closing or close of escrow, National 1031 and Exchangor enter into the Exchange Agreement, the Exchangor assigns all rights under the sales contract to National 1031, and the property is sold to the buyer. Legal title to the property is deeded directly by the Exchangor to the buyer.
- National 1031 receives and holds the proceeds of the sale subject to its continuing responsibility under the Exchange Agreement to acquire replacement property for the Exchangor.
- National 1031 sends the Exchangor a letter specifying the amount of proceeds held by National 1031, the Exchangor's 45-day "identification" and 180-day "exchange" deadlines, instructions on identification and a form to identify the replacement property or properties.
- Within 45 calendar days after the closing of the sale of Exchangor's property, Exchangor identifies in writing to National 1031 one or more replacement properties (usually up to three properties) the Exchangor is interested in acquiring.
- Exchangor negotiates a real estate purchase contract with the seller of each of the properties to be acquired as replacement property.
- National 1031 prepares closing instructions to the closing or escrow agent regarding preparation of the settlement statements and other closing documentation for each replacement property. At the closing, Exchangor assigns all rights under the real estate purchase contract to National 1031, and the replacement property is purchased using proceeds from the sale of Exchangor's property and, if necessary, with additional funds provided by Exchangor and/or financing arranged by Exchangor. Legal title to the property is deeded directly by the seller to the Exchangor.
For a delayed exchange to be successful, the purchase of all replacement property to be acquired as part of a unified exchange must be closed within 180 calendar days of the date that the sale of the Exchangor's property was closed.
Fees, Interest & Costs
National 1031 charges a reasonable fee to set up a deferred or simultaneous exchange based upon the value of the property or properties being sold, with a minimum of $300 per relinquished property. A flat fee of $300 is charged for the acquisition of replacement property in the exchange. National 1031 pays interest on the total balance of exchange proceeds held during an exchange at a rate which is tied to the current 90-day Treasury Bill rate if the amount of exchange proceeds exceeds $200,000. Fees for handling special exchange transactions, such as improvement exchanges and reverse exchanges, are based upon a standard fee plus a percentage of the value of the property held by National 1031. Ordinary and necessary expenses for delivery services and wire transfers are charged by National 1031 to the Exchangor. For more information please review our fee schedule
Conclusion
National 1031 offers professional and experienced Qualified Intermediary services that provide the maximum assurance to investors and their advisors that exchange transactions will be completed as planned and with the desired tax results. We invite your questions regarding our services or fees, and hope that you will contact us to discuss your particular situation.
THE INFORMATION HEREIN IS NOT TO BE CONSTRUED TAX OR LEGAL ADVICE. IF TAX OR LEGAL ADVICE IS NEEDED, AN ATTORNEY, ACCOUNTANT OR OTHER QUALIFIED COUNSEL SHOULD BE CONSULTED.
