What is a Tax Deferred Exchange?
A Tax Deferred Exchange is a method by which the owner of a property Exchanges one property for another without having to pay the Capital Gains Taxes which may be due from the sale of the first property. Taxes may still be due but they will be deferred until a later time.
Why do I need to use an exchange facilitator or intermediary?
Under the IRC Section 1031 regulations, in order for you to defer the Capital Gains, you must enter into an Exchange Contract with a facilitator or intermediary who is neither a taxpayer nor Disqualified Person. As detailed in the Exchange Contract, the facilitator or intermediary then takes title to your properties, makes the necessary deed transfers and handles the escrow of funds on your behalf. The end result is that you will have replaced one business/investment property for another and deferred the capital gains in the process.
Who would be considered a Disqualified Person?
Disqualified persons include, but are not limited to, employees, realtors, attorneys, and/or accountants with whom you have had business dealings within 2 years prior to the initiation of your exchange, and entities, such as partnerships or corporations, in which you have held a 10% interest or more. The list is lengthy. Please give us a call and we can go through it with you.
What is the Exchange Contract all about?
The written Exchange Contract details the roles assigned and assumed, respectively, by you as the Exchangor and REALTEX as the facilitator in the exchange process. Further, and most importantly, it limits your rights to receive, pledge, borrow, or otherwise obtain the benefits of money or other property held by REALTEX as your facilitator. (See Constructive Receipt in the Glossary.)
What kinds of Real Properties can be Exchanged?
Real property which has been reported on ones income tax returns as being used for business or investment related purposes will qualify. Second homes and primary homes will not qualify.
Must the Replacement Property be used for the same purpose as the Relinquished Property?
No, not necessarily. You may, for example, own vacant land which you have held for investment purposes and wish now to buy a duplex at the shore as a rental property.
Am I limited to Exchanging one property for one property?
No. You may have 2 business/investment properties you wish to sell and replace with one property or visa versa. As long as you stay within the time frame allotted by the IRS in which to complete the Exchange, you may Exchange multiple properties.
What are the time frames involved in doing an Exchange?
You have 45 calendar days from the date you close on your Relinquished Property to identify your Replacement Property or properties, and then you have 180 calendar days from that first closing to complete the acquisition of the Replacement Property or properties.
Does the IRS allow for any extensions of those time frames?
In a word, "NO."
Do the parties who initiate the Exchange have to be the same who complete the Exchange?
Yes. For example, if you own the property you are relinquishing as husband and wife, then you must buy the Replacement Property as husband and wife.
What if I own a property with another party and that party doesn't want to do an Exchange?
You yourself can be the Exchangor as the owner of a certain percentage interest in the Relinquished Property. The other owner need not join in the Exchange.
Can I sell a property in New Jersey and buy the Replacement Property in Kansas?
Yes, you can Exchange business/investment property throughout the United States.
Can I enter into a contract to buy my Replacement Property before I sell my Relinquished Property?
Yes. However, you must first close on the Relinquished Property before you close on the Replacement Property. If you close on the Replacement Property first, you will either negate the Regular Exchange or you will be doing a Reverse Exchange.
What is a Reverse Exchange?
If you first purchase your Replacement Property before you sell your Relinquished Property, you will be doing a Reverse Exchange. It gets a bit complicated but it is doable. Again, you must complete the entire transaction by selling your Relinquished Property within 180 days of the purchase of your Replacement Property.
Can I sell my Relinquished Property for, say, $450,000 and purchase a Replacement Property for $300,000 but make improvements to the Replacement Property to bring the value up to the $450,000, value of the Relinquished Property?
Yes. We have the expertise to assist you to accomplish your goal. Call us for details.
We encourage you to contact us with your specific questions so that we can give you personalized attention and solutions to assist in the deferral of the Capital Gains Taxes on your business/investment property.