|1031 TAX DEFERRED EXCHANGES
SAFE HAVEN OR SHIPWRECK
A 1031 tax deferred exchange is simply a method enabling property owners to trade an
investment property for another investment property without paying capital gains taxes
on the transaction. Such taxes can be more than 1/3 of the investors’ capital gain.
The property surrendered and the property received must be “like-kind”.
All real property is “like-kind” with all other real property.
Some examples are:
-residential for commercial
-vacant land for multi-family residential
-industrial for farmland
I.R.C. Section 1031 does not apply to exchanges of stocks, bonds, notes, securities, or
interests in a partnership.
DELAYED EXCHANGES AND DEADLINES
The most popular exchange is the delayed exchange, often referred to as a “Starker”
exchange. Strict adherence to the following deadlines with absolutely no extensions, will
avoid the payment of capital gains for the transaction.
The 1031 exchange begins on the date of closing of the property being sold (the
relinquished property). The exchange must end within a maximum of 180 days with the
closing on the acquisition of the replacement property. This 180 day timetable is called
the Exchange or Acquisition Period.
During the first 45 days the replacement property must be identified and written
notification given. These deadlines are strict. For example a deadline that falls on
Thanksgiving, Christmas or New Year’s Day is not extended.
THE QUALIFIED INTERMEDIARY
The use of a Qualified Intermediary is necessary for the successful completion of a tax
deferred exchange. It is imperative that the seller not receive any of the funds from the
sale, proceeds must go directly to the Qualified Intermediary. Although it is permitted
that the contract deposit can be held by the seller’s attorney, once title has been conveyed
all proceeds must be paid to the Qualified Intermediary.
When it is time to purchase the replacement property (within 180 days) the qualified
intermediary closes the transaction and pays the funds to the seller of the replacement
The Qualified intermediary must be an entity who is neither the taxpayer or an agent of
the taxpayer. There must be a written agreement (the Exchange Agreement).
The use of a Qualified Intermediary is known as a “safe harbor”.
Call Judicial Title to insure a smooth trip through your next 1031 exchange.