Savvy investors know that Internal Revenue Code (IRC) Section 1031 provides a vehicle for deferring capital gain taxes while disposing of investment property. The United States Treasury Department has validated the services of a qualified intermediary to complete a tax-deferred exchange.

Thanks to the IRC §1031, a properly structured exchange allows an investor to sell an investment property, and acquire a new property, and potentially defer all capital gain taxes. IRC §1031 (a) (1) states: “No gain or loss shall be recognized on the exchange of real property held for productive use in a trade or business or for investment if such real property is exchanged solely for real property of like kind which is to be held either for productive use in a trade or business or for investment.”

THE POWER OF FLEXIBILITY

Pursuant to IRC §1031, capital gain deferment requires the exchange of “like-kind” relinquished property for other “like-kind” replacement property. Generally, real property held for investment or real property used in a trade or business can be exchanged for other real property held for investment or real property used in a trade or business.

THE DELAYED EXCHANGE

A delayed exchange is the most common exchange format. It provides investors up to 180 days to acquire replacement property through the use of a qualified intermediary to complete a valid delayed exchange.

SALE OF THE RELINQUISHED PROPERTY

Prior to closing the sale of the relinquished property, the Exchanger enters into the Exchange Agreement with API. Pursuant to the Exchange Agreement, an Assignment is executed prior to closing, and Exchanger assigns its rights under the Purchase and Sale Agreement to API. API instructs the closing/escrow officer or closing attorney to directly deed the property from the Exchanger to the Buyer. Proceeds are transferred directly to the qualified intermediary, thereby protecting the Exchanger from actual or constructive receipt of funds. Please note that §1031 Regulations mandate restrictions on the Exchanger’s ability to access exchange proceeds at any time. Please consult with API for more details on these restrictions.

IDENTIFICATION OF REPLACEMENT PROPERTY

The Exchanger must properly identify potential replacement properties within 45 calendar days. API provides the Exchanger with the specific identification requirements.

PURCHASE OF THE REPLACEMENT PROPERTY

The Exchanger has a total of 180 calendar days from closing of the relinquished property, or their tax filing date (including extensions), whichever is earlier, to acquire “like-kind” replacement properties. Prior to closing on the replacement property, the Exchanger assigns the Purchase and Sale Agreement to the qualified intermediary. After the Assignment is executed, the exchange is completed when the Qualified Intermediary purchases the replacement property with the exchange proceeds and transfers it back to the Exchanger by a direct deed from the Seller.

THE EXCHANGE EQUATION: 100% TAX DEFERRAL

To fully defer all capital gain taxes, an exchanger must meet two requirements:

1. Reinvest all exchange proceeds to acquire like-kind property.
2. Acquire like-kind property of equal or greater value.

WHAT’S THE FIRST STEP?

Always discuss a 1031 tax-deferred exchange with your tax and/or legal advisors. Call Asset Preservation for a free consultation, and definitely before closing on the relinquished property.

Asset Preservation, a Stewart subsidiary, is a national leader in the 1031 qualified intermediary industry. We have a history of protecting investors’ assets through our expertise in specialized services that can defer capital gain taxation indefinitely. At API, we’re committed to providing investors with the highest level of experience, expertise and security of funds in the industry — what we call The API Advantage™.