1. "THE GOLDEN RULE" - You must Exchange for a property of equal or higher value and, in your Replacement Property, you must have equal or higher equity. If your Replacement Property costs less or you have less equity in it, at least a portion of your Capital Gains will be subject to tax.
2. USE OF PROPERTY - Both the property you convey and the property you receive in an Exchange must be business or investment properties. Remember, you cannot complete a Section 1031 Tax Deferred Exchange if either property is or will be a primary or secondary home.
You may rent your investment property to a family member only if it is their primary residence and they pay fair-market rent.
"LIKE USE" OF PROPERTIES IS NOT REQUIRED TO COMPLETE AN EXCHANGE. You can Exchange a vacant lot for a single home or a single home for a condominium unit.
Properties with mixed uses may be partially Exchanged. These require detailed analysis.
3. MULTIPLE PROPERTIES - You may make an Exchange of multiple properties. You may convey one and acquire more than one. You may convey more than one and receive only one in Exchange.
4. IDENTIFICATION OF REPLACEMENT PROPERTY -You must identify your Replacement Property within 45 days of the settlement on your Relinquished Property. Replacement Property should be identified by lot and block or street address. We will provide a form for the purpose of identification at closing. It must be compeleted, dated, signed and received by us within the 45 days.
Remember, you may identify up to 3 Replacement Properties without regard to value. We recommend that you identify more than one. If you identify only 1 and cannot acquire it, your ability to Exchange is eliminated.
You may also re-identify Replacement Property and re-submit an identification form. However, all re-identifications and re-submissions must be made within 45 days of the conveyance of the Relinquished Property.
5. RECEIPT OF REPLACEMENT PROPERTY - You must take title to your Replacement Property within 180 days of the date on which the Relinquished Property was conveyed, or by the date on which your tax return is due, whichever first occurs. If your tax return is due within that 180 days and you have not received your Replacement Property, seek an extension to your tax return filing date.
6. EXCESS PURCHASE FUNDS - NEVER!!! - Remember that REALTEX will receive and retain the proceeds of sale of the Relinquished Property. These funds will be applied toward the purchase of the Replacement Property. In most cases, the balance of the purchase price will be borrowed from a mortgage lender. DO NOT BORROW MORE MONEY THAN IS NECESSARY TO COMPLETE THE PURCHASE. If you do, you will receive the excess funds when you acquire the Replacement Property. The IRS will claim that these excess funds represent Capital Gains that you received. YOU WILL PAY CAPITAL GAINS TAX ON THE EXCESS FUNDS THAT YOU RECEIVE.
7. EXCHANGE PARTY RULES
A. Identical Parties - As a general rule, the parties conveying the Relinquished Property and the parties receiving the Replacement Property should be identical. Thus, if John and Mary Smith sell, John and Mary Smith should buy.
B. Co-owners - One of several co-owners may become an Exchangor. Thus, Tom Mills and Bob Jones may sell and only Bob Jones elects to reinvest his sales proceeds and become an Exchangor.
C. Partnership Problems - A partnership may make an Exchange. However, an Exchange cannot be completed if a partnership sells and one or more individual partners purchase Replacement Property. Similarly, individuals cannot sell Relinquished Property and then purchase Replacement Property in a partnership capacity.
8. MORTGAGE PAY-OFFS - Commonly, Relinquished Property is held subject to a mortgage lien that is satisfied when the property is conveyed.
The satisfaction of the mortgage lien presents no problem as long as the mortgage is a lien only on the Relinquished Property to be sold. If the mortgage is also a lien on the other property that you retain (a blanket mortgage), the pay-off of the mortgage will require the payment of Capital Gains Tax. Thus, the pay-off of a blanket mortgage must be prior to the conveyance of the Relinquished Property.
9. MORTGAGE HELD BY EXCHANGOR - If you convey Relinquished Property and hold a mortgage for the Buyer, the amount of the mortgage will be subject to Capital Gains Tax. Obviously, this sum will not be utilized to acquire Replacement Property.
10. ALLOCATION OF SALE PRICE - If you allocate the sale price of Relinquished Property between real property and personal property, you will pay Capital Gains Tax on the value of the personal property unless you complete a separate, personal property Exchange. Remember, you cannot acquire real property with the proceeds of the sale of personal property and complete a Tax Deferred Exchange.
11. NOTIFICATIONS - Notify REALTEX well in advance of the conveyance of your Relinquished Property and receipt of your Replacement Property. We will need the name, address, phone number and fax number of your realtor, title company, and attorney and/or accountant.
12. RELATED PARTY EXCHANGE -
A. You and a related party may directly Exchange investment properties. However, both parties must hold the property they receive in the Exchange for at least two years.
B. You may NOT sell your investment property to an unrelated third party and thereafter purchase Replacement Property from a related party.
Related parties include family members and organizations in which you have an interest greater than 10 percent.
13. RELEASE OF EXCESS EXCHANGE FUNDS - If you identify ONE Replacement Property, excess Exchange Funds may be returned to you immediately upon your receipt of the Replacement Property.
If you identify more than one Replacement Property, excess Exchange funds may be returned to you upon your receipt of ALL identified replacement properties OR after the expiration of the 180-day Exchange period, whichever first occurs.
14. LEGAL/ACCOUNTING ASSISTANCE -REMEMBER THAT REALTEX DOES NOT PROVIDE LEGAL OR TAX ADVICE. WE STRONGLY URGE YOU TO DISCUSS YOUR TAX OBJECTIVES AND EXCHANGE PLAN WITH AN ATTORNEY OR ACCOUNTANT OF YOUR SELECTION.
15. REVERSE EXCHANGE - You may wish to acquire Replacement Property prior to the conveyance of property that you now hold. This is known as a "Reverse Exchange." "Reverse" Exchanging is permitted. Contact us for current rules and regulations.
16. BUILD-TO-SUIT EXCHANGE - You may wish to convey your property and both acquire a vacant lot and build a home on it with the proceeds of cash. REALTEX can assist you to achieve this goal. Contact us for details.
It is our hope that these "REALTEX REMINDERS"will assist you to complete your tax deferred Exchange. Please contact us to discuss your individual Exchange objectives.