key element of any solid business plan is the protection of assets. Minimizing
your tax liabilities in addition to other operating expenses is equally as
important as maximizing your revenues. Prudent businesses protect their hard-earned
assets by engaging the services of a real estate professional to facilitate the
use of a tax deferred exchanges.
complete 1031 Exchanges to defer the capital gains tax on the disposition of
their investment properties. There are many different types of exchanges that
are available to investors, each with their own specific requirements and
sale of a business or investment asset can create a large tax liability. A
properly structured tax deferred exchange under Internal Revenue Code §1031
allows businesses and individuals to defer the recognition of capital gains and
other taxes associated with the sale, as long as new assets are purchased to
replace the relinquished assets. In general, most 1031 Exchanges are structured
either as a real property (real estate) or personal property (fleets of cars,
business equipment, artwork, etc) exchanges.
have the benefit of a 1031 Exchange, the property (or business asset) must have
been held by the client for productive use in a trade or business, or for
investment purposes. The property (or business asset) must also be exchanged
for like-kind replacement property that will be held for similar purposes. With
few restrictions, whether an exchange involves a parcel of real property (residential
or commercial), an airplane, a broadcast spectrum, or a fleet of cars,
exchanges allow businesses and individuals the flexibility to sell and buy
property with no significant changes to the terms of the sale and purchase
agreements. By utilizing a 1031 Exchange, clients are able to maximize their
capital by deferring the taxes that would otherwise be incurred on an outright
sale of their property and use the entire amount of the equity from the 1031
Exchange to acquire substantially more replacement property. Properly
structured, a 1031 Exchange becomes an invaluable tax savings and wealth
are the most common types of exchanges?
The Simultaneous Exchange
refers to an exchange wherein the relinquished property and the property to be
acquired have escrows that are closed simultaneously. It is extremely important
in this circumstance that each closing is contingent upon the other closing to
maintain the integrity of the exchange. As anyone who has ever been involved in
a complex real estate transaction knows, it is difficult to predict with
certainty exactly when a transaction will close. It is for this reason that the
Starker Delayed Exchange has come into favor with real estate investors.
The Delayed Exchange
stated above, because of the inherent problems associated with simultaneous
closings and the dangers of violating the rules of IRC 1031, more and more real
estate investors are using "Starker Delayed" exchanges as the method
of choice for completing tax deferred exchanges. The rules for using delayed
exchanges are to be found in the amendments to the tax code that Congress wrote
into the 1984 Tax Reform Act.
These rules are as follows:
The exchanger has a total of 45 days from the closing of the property that is
disposed of to identify up to three potential replacement properties.
2. Or the exchanger can identify any number
of properties so long as their combined fair market value does not exceed 200%
of the value of the property being disposed of.
3. The 95% exception rule, states that
neither of the first two rules apply if 95% of the value of all of the
properties identified are actually acquired.
4. The exchanger has a total of 180 days
from the close of the property that was relinquished (sold) to close on the
replacement property. Remember that the rule is not six months, but 180 days.
the delayed exchange method, it is necessary to engage the services of a
competent and reliable exchange intermediary. The intermediary will hold the
proceeds of the relinquished property in trust for the exchanger and upon the
instruction of the exchanger, acquire one or more of the named properties and
assist in the closing of the replacement property.
We prefer to use an intermediary who offers a Letter of Credit backed up by the
assets of a financial institution to guarantee the safety of the funds held
during the course of the exchange. Please refer to the following article,
Simplifying Exchanges Through The Use of An Intermediary, by Robert F. Egenolf,
J.D., LL.M. Mr. Egenolf is an attorney who specializes in IRC 1031 Tax Deferred
Exchanges. He has lectured and written extensively about this topic. He is also
the President of Amherst Exchange Corporation, an intermediary for tax deferred
more information regarding a 1031 Exchange and how to properly structure your
next transaction, please contact our office.
We have obtained the above information from sources believed to be reliable,
but no representations of any kind - expressed or implied-are being made as to
the accuracy of such information. All references to income/expenses are
approximate only. Buyer should conduct an independent investigation of all
pertinent property information. We bear no liability for any errors,
inaccuracies or omissions.