What is a 1031 Exchange?
IRS Code Section 1031 allows investors to defer capital gains tax on the sale of property, if certain guidelines are followed. The use of a Qualified Intermediary (QI) is required to act as a principal, prepare required documents and hold the sale proceeds until the purchase of a replacement property.
What is a Qualified Intermediary (QI)?
The IRS rules require the use of a Qualified Intermediary, also known as 1031 Facilitators, or Exchange Accommodators. The QI must be an independent third party and cannot be the exchanger’s attorney, accountant, realtor or agent of the taxpayer in the previous two years.
How Do I Choose a QI ?
The Federation of Exchange Accommodators (FEA) is a national organization of Exchange Intermediaries. Because 1031 exchanges are complex transactions, the FEA recommends choosing a Certified Exchange Specialist® (CES®). This is awarded only to FEA members who meet specific work-experience criteria and pass an exam on exchange laws and procedures.
Do I Need to Actually Exchange Property?
No, the taxpayer (exchanger) sells any investment property – anywhere, any type and buys any type of investment real estate – anywhere. Exchange is a term used by the IRS to indicate a continuity of real estate investment even if the property type and location change.
How Do I Start a 1031 Transaction?
First – Make any sales contract of any investment property “assignable”, by adding “or assigns” after the seller’s name. Go to our Web site www.1031taxfree.com for information and a Sell Worksheet.
Second – Contact Keys Capital Inc. when the sales contract is signed. Complete our work sheet. We will fax documents to your closing agent before the title search is completed and no delays will result.
Third – Start shopping for your replacement property, even before the closing on the sale property.
What are the Time Limits on a 1031?
The replacement property must be acquired within 180 days of the sale of the relinquished property. Generally three replacement properties must be identified within 45 days after the sale.
What Properties Qualify and Do Not Qualify for a 1031?
All properties held for income or investment purposes qualify for non-taxable treatment. Properties that do not qualify include your home, property held for sale, stocks, bonds, and notes.
How Are the Funds Held?
The funds can be held in a dual signature account, so that the taxpayer must sign for any withdrawals.
Are There Restrictions on Numbers of Properties Bought or Sold?
No. You can sell 5 houses and by 1 apartment building, OR, sell a commercial property and buy 50 lots.
Is a 1031 Transaction Completely Tax Free?
It can be. It is tax deferred until a taxable sale takes place. If property passes to heirs, they receive it at a stepped-up (market value) basis and no tax is due.
How Can I Do a No-Tax 1031 Sale?
Purchase replacement property with equal or greater value and equal or greater debt than the sale property.
Is a 1031 Sale and Repurchase an IRS Audit Item?
No. A Sale does not cause an audit. The careful documentation of the sale, funds escrow and repurchase in a timely manner by a neutral QI should help any request for information from the IRS.
Can I Take Some Cash From a 1031 Sale?
Yes. You can take some taxable cash from the sale closing (“boot”) and reinvest the balance tax free.
Do I Need a QI for a Simultaneous Exchange?
Yes. To be safe, a neutral fourth party (QI) transfers ownership and protects the exchanger from constructive receipt of the funds. The QI produces all the documents and limits the liability of all parties.
What is the Federation of Exchange Accommodators (FEA)?
The FEA is a national professional organization of Exchange Intermediaries. It conducts regional and national meetings and requires members to subscribe to a strict code of ethics. They also work with the IRS and other government agencies on Exchange issues. Members are notified of recent court cases, letter rulings and developments on 1031 related matters.
How Do I Choose a QI?
Carefully – The (QI) plays an integral role in this process by providing investors and their legal, financial, and real estate advisers the level of assistance needed for a successful 1031 exchange.
The Federation of Exchange Accommodators (FEA) is a national organization of Exchange Intermediaries. Because 1031 exchanges are complex transactions, the FEA recommends choosing a Certified Exchange Specialist® (CES®). This designation is awarded only to FEA members who meet specific work-experience criteria and testing.