1031 Exchange Qualified Intermediary

1031 Exchange Timeline Overview and Considerations

Anonymous — Thu, 19 Aug 2021 17:23:52 +0000

1031 Exchange Timeline Overview and Considerations

Anonymous (not verified) Thu, 08/19/2021 - 17:23

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1031 Exchange Timeline Overview and Considerations

IRC Section 1031 has been around for more than 100 years. Although the overall concept and purpose of 1031 like-kind exchanges have largely remained the same, the regulations and sequence of events an exchange must comply with have evolved. Legislation has sought to address and prevent potential wrongdoings or misinterpretation, as was done in the landmark legal ruling in the Starker vs US case. To fully benefit from the tax deferral, the requirements to exchange are as follows:

An exchange must be facilitated through a Qualified Intermediary (QI)
Property must be held for investment or business purposes
There must be no constructive or actual receipt of exchange funds
Taxpayer must adhere to the time limits set out in the tax code
Property must be "like-kind"
The property exchanged into must be equal or up in value

The requirement that investors tend to feel is the most restrictive once they deem their property eligible for exchange is the strict timeline they must follow.

Forward Exchange

In a typical forward exchange, the taxpayer will hire a Qualified Intermediary (QI) to help transact their exchange. The taxpayer will list their property, and once it sells, the QI will hold the proceeds from the sale of the relinquished property for later use in purchasing the identified replacement property(s). Once the relinquished property sells, the taxpayer has 45 days to identify replacement property(s) and 135 days after that to finalize their exchange for a total of 180 days.

Reverse Exchange

The Internal Revenue Service (IRS) does not allow a taxpayer to hold the replacement property and the relinquished property simultaneously. This restriction can present challenges to investors who would like to purchase their replacement property before selling their relinquished property when a reverse exchange is required. The timeline of a reverse 1031 exchange, sometimes called a parking exchange, is the same as a forward exchange. The main difference is that instead of the QI holding funds, they hold a property. After hiring the qualified intermediary, the taxpayer and QI will open an LLC that will act as the Exchange Accommodation Titleholder (EAT), which will hold the replacement property as the taxpayer sells the relinquished property. Once the EAT has taken the title of the new property, the exchanger has 45 days to identify the property they will be selling. After the initial 45 days, the taxpayer has the remaining 135 days of the total 180 to sell the property they identified and finalize the exchange.

Build-to-Suit or Improvement Exchange

There are times when a taxpayer would like to sell a property and exchange it for a property they would like to develop or improve. Build-to-suit exchanges refer to exchanges in which improvements are made on the property acquired. In a build-to-suit or improvement exchange, the taxpayer can sell their property to purchase and improve a new property or purchase the replacement property first and then use the funds from the sale of the relinquished property to pay back loans used to fund the initial purchase and improvements. In both cases, the taxpayer has 180 days to use the balance of funds to improve the property. Any funds that have not been used during the parking period are considered real estate “boot” and are subject to capital gain tax. The 180-day time limit begins when the EAT, set up with the QI before the exchange, assumes title of the property.

1031 Exchange Timeline Considerations

Following the timeline on a 1031 exchange is not always as easy as it sounds. A taxpayer may not be able to identify a suitable property to buy in the 45-day identification period. A taxpayer may not be able to sell their property within 180 days. Improvements on a property may take longer than 180 days. Once a safe harbor provision is not met, the exchange is no longer eligible for tax deferment.
Here are a few ways of setting yourself up for a successful exchange:

If you want to begin a forward exchange, start looking for your replacement property as early as possible
You can stretch out this extra period by delaying the close date on your relinquished property, preventing your 45-day countdown from starting
If you have already identified a property you would like to purchase but have not been able to sell your current property, consider a reverse exchange. That way, you will ensure your purchase and have 180 days to sell the old property
To avoid unwanted delays that may cut your 1031 exchange timeline short, ensure that your financing is in order before entering into an exchange agreement

1031 Exchange Timeline and Identification Requirements

Anonymous — Fri, 06 Aug 2021 18:50:25 +0000

1031 Exchange Timeline and Identification Requirements

Anonymous (not verified) Fri, 08/06/2021 - 18:50

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1031 Exchange Timeline and Identification Requirements

Since 1921, the rules for qualifying and completing 1031 exchanges have gradually broadened and become less restrictive. Even so, there are dos, don’ts, and several gray areas of which taxpayers should be aware. As an experienced Qualified Intermediary, Accruit is accustomed to dealing with all types of complex exchanges and wants to make sure that the complexity of exchange does not deter property owners from considering one. Accruit can help you put the pieces together for a successful 1031 exchange.

For the taxable gain to be deferred, specific vital requirements must be satisfied:

Properties must be exchanged, rather than sold and then purchased
There must be no constructive or actual receipt of proceeds received by the taxpayer from the transfer of the relinquished property pursuant to the relinquished property contract
Properties must be “Like-Kind”
Properties must be held for business or investment purposes
Exchange must be equal or up in value
The exchange must follow time limit and identification requirements: A taxpayer must acquire or identify the target replacement property within 45 days after the transfer of the relinquished property. Properties received (purchased) within the 45-day designation period are deemed to be identified. The replacement property must be designated in a written document, unambiguously described, signed by the taxpayer, and received by the qualified intermediary on or before the 45th day. If the taxpayer identifies replacement property within the designated period, the exchange period end date may be extended up to 180 days from the transfer of the first relinquished property. This provides the taxpayer with additional time to complete the exchange. However, it might be necessary for the taxpayer to file a tax-filing extension to utilize the full 180 days.

Property Identification

In a typical forward exchange, the taxpayer will hire a 1031 exchange qualified intermediary (QI) to help transact their exchange. The QI will hold the proceeds from the sale of the relinquished property to use later to purchase the identified replacement properties. Once the relinquished property is sold, the taxpayer has 45 days to identify replacement properties and 135 days after that to finalize their exchange for a total of 180 days. The property requirements can be found in more detail in “1031 Exchange Explained: Equal or up in Value”. Here’s an example to better explain the timing regulations.

“Mr. Clark wants to sell his farmland and exchange it for a less laborious property. Before he lists his property, Mr. Clark reaches out to the QI he would like to work with and begins the necessary documentation for his exchange, then listing his farm for sale. Mr. Clark can look for replacement properties while his farm is on the market, but his identification period officially begins the day his farmland sells.

During his 45-day identification period, Mr. Clark identifies a small commercial office building he would like to acquire. One of the critical conditions when identifying property is the specific description when relaying the information to your QI. It would not suffice if Mr. Clark were to contact his QI and describe the property he would like to acquire as “an office building near the business district.” Mr. Clark must unambiguously identify his property, with an address, as “100 Main St. Denver, CO.””

There are two rules to follow when describing specified property:

Replacement property is identified only if it is unambiguously described in the written document or agreement
Real property is generally unambiguously described if it is characterized by a legal description, street address, or distinguishable name (e.g., the Mayfair Apartment Building)

Keep in mind that once a property is identified within the 45-day period, the only way to end the exchange early is if there occurs a material and substantial contingency that relates to the exchange is provided for in writing is beyond the taxpayer’s control or any other disqualified person. Otherwise, the funds must remain in the exchange account for the entire 180-day exchange period. For example:

“Mr. Clark identifies the property he wants to acquire early on in the 45 days. Once he gives written and unambiguous notice, the funds received from the sale of his old property must remain with the QI until the identified property is purchased or 180 days whichever is earlier.”

1031 Exchange Explained by Accruit - Your Trusted Qualified Intermediary

Anonymous — Thu, 01 Jul 2021 19:13:39 +0000

1031 Exchange Explained by Accruit - Your Trusted Qualified Intermediary

Anonymous (not verified) Thu, 07/01/2021 - 19:13

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1031 Exchange Explained by Accruit - Your Trusted Qualified Intermediary

When you sell a piece of real estate the value of which has appreciated overtime, you have to pay a lot of taxes. After all you can’t really fully benefit from your real estate investment without paying taxes, can you? Actually, you can.

Back in 1921 Congress concluded that an investor simply switching from one property to another was only continuing the same investment and should not incur a taxable event. They called this a 1031 like-kind exchange. So, when you sell a piece of real estate and purchase a new one of at least equal value, you can defer tax payments. The key, follow the regulations.

First, choose a qualified intermediary or ‘QI’ such as Accruit, to process the exchange of properties. Next, transfer the property your relinquishing through the QI to the buyer. The QI holds the funds on your behalf for the time of sale to the time of purchase. Within 45 days, settle on possible new properties and within 180 days close on the replacement property which the QI acquires with the money held from the initial sale. The new property is transferred through the QI to you investor completing the task exchange between you and the QI.

When you partner with a trustworthy and experienced QI 1031 exchanges allow you to defer taxes that can otherwise eat up to a third of your profit. To speak to the leader in 1031 exchanges contact Accruit today.

Holding Periods in a 1031 Exchange

Anonymous — Thu, 24 Jun 2021 16:55:08 +0000

Holding Periods in a 1031 Exchange

Anonymous (not verified) Thu, 06/24/2021 - 16:55

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Holding Periods in a 1031 Exchange

Since 1921, the rules for qualifying and completing 1031 exchanges have gradually broadened and become less restrictive. Even so, there are do's and dont's, and several gray areas of which taxpayers should be aware. A Qualified Intermediary (QI), like Accruit, is accustomed to dealing with all types of complex exchanges, and wants to make sure that the complexity of an exchange doesn't deter you from considering one. Your QI will help you put the pieces together to process an exchange successfully.

For the taxable gain to be deferred, specific key requirements must be satisfied:

Properties Must Be Exchanged
There Must Be No Constructive or Actual Receipt of Exchange Funds
Properties Must be "Like-Kind" 
Exchange Must Be Equal or Up in Value 
Taxpayer Must Follow Exchange Time Limit & Identification Requirement

Properties Must Be Held for Business or Investment Purposes:

The relinquished property and the replacement property must be held for business or investment purposes. For example, a sale of business property is not required to be replaced with other business property; it can be replaced with investment property or vice versa.

There are no standard or specific 1031 exchange holding periods by which a taxpayer must abide for property to meet the definition of "like-kind" or held for investment or business use. The only exception is Section 1031 of the Tax Code, with certain limited exceptions, prohibits exchanges where the taxpayer intends to acquire replacement property from a related party.

Related Party is defined in I.R.C. § 267(b) or 707(b)(1) and generally covers exchanges between family members as well as exchanges between other entities where there is a high commonality of ownership. Related Parties are discussed below.

Holding periods are, therefore, determined on a case-by-case basis regarding the taxpayer's genuine intentions based in part on:

Reasons for acquiring, holding, and disposing of the property.

The taxpayer's primary occupation.

Previous 1031 exchange activity.

Use of the property.

Generally, the longer the holding period, the better. However, a taxpayer who is disqualified from utilizing the benefits of Section 1031 would not then qualify merely because of a long holding period. What the Code, the courts, and the I.R.S. want to prevent is taxpayers holding property primarily for sale and attempting to defer their taxes utilizing Section 1031 (e.g., a builder of residential subdivisions).

1031 Exchange Related Party Rules

When a taxpayer exchanges like-kind property with a related party, the exchange is subject to related party restrictions, one of them being the Two Year Holding Period. When a taxpayer exchanges like-kind property with a related party, the exchange will at least qualify for tax deferral per Section 1031. However, the property received by either the taxpayer or related party must be held for at least two years before it is again exchanged or sold. If either party does not hold the property for at least two years, then the deferred gain or loss from the original exchange must be recognized. (Section 1031 (f))

Example: Mr. Jones owns an apartment building in Utah and wants to trade for a vacant rural lot in Wisconsin from his daughter Jane. Suppose either Mr. Jones or Jane sells or disposes of the property received from the exchange within two years. In that case, the deferred gain from the original exchange becomes fully taxable to Mr. Jones on the date of the subsequent disposition.  

A taxpayer is well served by finding an exchange company well-versed in the complexities surrounding 1031 exchanges and the tax law considerations associated with them. As with all matters concerning 1031 exchanges, it is highly advisable to consult with an independent professional regarding any proposed transaction's legal and tax consequences.

To learn more about the considerations for deferral state tax, we offer a free, no-obligation consultation with one of our subject matter experts.

1031 Exchange Explained - Top 25 FAQ's Answered by Subject Matter Experts

Anonymous — Tue, 15 Jun 2021 18:36:00 +0000

1031 Exchange Explained - Top 25 FAQ's Answered by Subject Matter Experts

Anonymous (not verified) Tue, 06/15/2021 - 18:36

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1031 Exchange Explained - Top 25 FAQ's Answered by Subject Matter Experts

Top 25 1031 Exchange FAQs

1. Can some of the members of an LLC do their own exchange or cash out at the time of the sale of the property?

The IRS Code does not allow members/partners to do his or her own exchange, only the entity can do so. Given enough preplanning, there is a technique referred to as a “drop & swap” whereby certain members/partners can drop their interest from the entity and enter the exchange individually and not at a member/partner.

2. When doing an exchange, is it sufficient to get tax deferral if the gain is rolled over?

No, to fully shelter the gain, the sale price of the relinquished property, net of closing costs must be reinvested. Another way to look at this is that the net amount going into the exchange account must be reinvested and there must be equal or greater mortgage debt on the new property compared to what was paid off upon closing of the old property.

3. The Qualified Intermediary wants how much just to hold my money?!

Under the regulations there are quite a few options to deal with holding the money from the sale. Some do not require putting the money with the QI although that is generally the easiest and most convenient. The real reason a taxpayer must use a QI is, through the paperwork provided, use of a QI converts the transaction of the sale of a property and the later purchase of a new property to an exchange of the one for the other.

4. Does it jeopardize my exchange if the other party to the sale or purchase contracts chooses not to sign receipt of the notice of assignment?

No, there is no requirement under the regulations that the counterparty needs to sign receipt of the notice of assignment. Rather the only requirement is that the other party needs to receive the notice of the assignment. Receipt for it may be a common courtesy but it does not harm the exchange if the party prefers not to sign for that notice.

5. Can I pay my replacement property loan application and related fees out of my exchange account?

No, an exchange is a like kind exchange of real estate for other real estate. Incidental costs such as paying loan related fees do not constitute the direct payment for like kind real estate.

6. Can I pay my attorney fees out of the exchange account?

To pay such fees out of an exchange account, the fee needs to meet two pronged criteria. First, the fee must relate only to legal services pertaining to the sale and/or purchase. The second one is that the type of payment must be one that is typically found on a closing statement in the locale where the property transaction takes place.

7. Are there any special rules regarding notice of assignment when there are others selling with me or buying with me?

Yes, the Regulations require that all parties to the contract must receive notice of the assignment by the taxpayer of his/her interest. So should there be other parties selling or buying with the taxpayer, those parties must get the notice as well as the party on the opposite side.

8. Under the safe harbor, is the Qualified Intermediary the one to whom I must give the 45-day notice of identification to?

No, the Regulations provide that any party to the exchange can be the necessary recipient of the notice. So, for example if the contract with the seller of the new property contains a reference in the contract stating that this is the replacement property for the buyer’s exchange, that would be sufficient.

9. If I am involved in a related-party transaction, is it cured if both parties hold onto the property for at least two years?

No, this is a misconception. The two-year curative provision only applies if the related parties are exchanging directly with one another. This is seldom the case. In a situation where the taxpayer sells the relinquished property to a third party and acquires and holds replacement property for an excess of two years from the related party, that is not sufficient to meet the rule.

10. Is the exchange invalidated under the related-party rules if I sell the relinquished property to a related party?

No, the purpose of adding the related party rules to the Tax Code was to prevent taxpayers from manipulating the tax result by buying replacement property from a related party such as a subsidiary company. That so called tax abuse is not applicable when a party is selling the relinquished property to a related party.

11. Can I buy my replacement property from my relative such as my son-in-law or cousin?

Yes, the related party rules to not necessarily include all relatives. Rather they disallow persons that are descendants or one another. Lineal descendants such as Parent, child, grandparents, siblings are considered related for this purpose, not so for in laws, aunts, uncles, cousins, etc.

12. How do I report a sale of relinquished property in year prior, but exchange proceeds are paid to me in the next tax year?

The default is that the payment of the tax is treated as an installment and payable in the year in which the funds were able to be paid out. Should a particular taxpayer wish to pay it in the first year to take advantage of tax losses in that year or for other reasons that can be done by a special election.

13. In a reverse exchange, since the Accommodator will be in title, does that mean it collects the rent from the property tenants?

No, the Reverse Exchange Rev. Proc. is very taxpayer friendly and relations between the Accommodator and taxpayer do not have to be arm’s length. Typically, the Accommodator will Master Lease the property to the taxpayer enabling the taxpayer to manage the property, collect the rent and pay for expenses.

14. In connection with my exchange, my bank is willing to lend me 80% LTV. Does that work for me for my exchange?

No, this is a common problem. Since for exchange purposes a taxpayer must roll over all the net cash, the amount of the loan should be for the remainder of the purchase price.

15. Can I do an exchange of a franchise where I own the land and the business?

No, effective with the current changes to the Tax Code made beginning with the year 2018, only real estate can be the subject of an exchange. As a result, personal property such as a business or franchise cannot be the subject of exchanges.

16. Can I refinance the relinquished property prior to the exchange or the replacement property after the exchange?

While there is nothing in the Regulations on this question, for technical reasons it is considered bad practice to refinance in anticipation of entering an exchange. By doing so, it changes the amounts on cash and debt that would need to be applied to the replacement property acquisition and it is tantamount to “gaming the system”. Refinancing after an exchange to pull some equity out does not have these issues and is considered proper.

17. Can I, as seller, or my attorney, hold the earnest money prior to the closing of the RQ Property?

Yes, that does not cause any issues since the exchange rules do not come into play until the time the relinquished property is transferred. At that time neither the taxpayer nor his/her agent should be holding onto exchange funds.

18. Does the Qualified Intermediary have to be referenced on the Settlement Statement or sign it?

The primary purpose of a Settlement Statement on a commercial transaction is to let the buyer and seller see how the amount they must pay, or the amount received was calculated. As a legal matter it is not required by any exchange rules. However, in different jurisdictions settlement agents have the practice of refereeing the Qualified Intermediary and/or having it sign the Settlement Statement.

19. Can a 1031 exchange be done where I am the seller or buyer under articles of agreement for deed?

Yes, but there are some challenges. If a taxpayer is selling on an installment basis, to the extent that most of the purchase price is payable beyond the 180-day exchange period, the taxpayer can only get deferral if he/she advances the amount into the replacement property even though it may not be received for a period of years. A buyer can but under an installment contract and the balance that is carried by the seller is treated like any other debt, such as a new loan by a bank lender.

20. Can an exchange be done where all or part of the sale price involves owner financing?

Yes, same answer as above. The seller would have to advance the sum being financed into the replacement property. Later receipt of that principal sum from the buyer would be tax deferred. Interest paid during that period would be taxable.

21. Can credit card bills or other costs be paid out at a closing upon the sale of relinquished property?

Some costs that pertain closely to the sale of the property such as commissions, title insurance fees, closing fees, recording fees, transfer taxes, etc. can come out of the proceeds before the net amount is sent to the Qualified Intermediary.

22. In a reverse exchange, how is it determined whether to park the replacement property or the relinquished property?

As a rule of thumb, it is generally easier to park the replacement property. However, when the taxpayer has financing set up for the replacement property that the lender will not allow to be in the name of the Accommodator, this cannot be done. There may be other reasons as well such as known environmental issues on the replacement property.

23. For a reverse exchange, are a double set of real estate transfer taxes applicable when there is an extra conveyance of title?

The IRS issued a ruling years ago that said for purpose of the Accommodator’s role in holing and transferring reverse exchange property, it could be considered the agent of the taxpayer and as a result extra transfer taxes did not need to be paid. There are a few states that still require payment regardless of the IRS ruling.

24. If I am doing a reverse exchange, do I still need a conventional forward exchange?

Yes, many people think if they are doing a reverse exchange, that is an alternative in lieu of the reverse exchange. That is not correct. The only thing a reverse exchange does is to allow the taxpayer to effectively control the replacement property when the corresponding relinquished property cannot be sold first. A forward exchange is still necessary to exchange the old property for the new property.

25. For a reverse exchange, do I have to get those funds being lent to the Accommodator prior to closing?

The IRS rules allow the taxpayer to lend the necessary funds to the Accommodator, but just like a bank lending funds, those funds are typically provided directly to the settlement agent and do not need to come to and through the Accommodator.

For more information regarding Section 1031 tax deferred exchanges, contact Accruit by phone – 800-237-1031 or visit Accruit's 1031 Explained page online.

Support Section 1031 Like-Kind Exchanges

Anonymous — Thu, 27 May 2021 15:56:32 +0000

Support Section 1031 Like-Kind Exchanges

Anonymous (not verified) Thu, 05/27/2021 - 15:56

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Support Section 1031 Like-Kind Exchanges

Section 1031 of the tax code positively impacts more than 19,500 communities, supports 568,000 jobs and adds $55 billion in value to our GDP. 1031 like-kind exchanges facilitate repurposing commercial real estate to a more productive use and helps American farmers better finance their operations. President Joe Biden’s proposed American Family Plan places severe limitations on Internal Revenue Code Section 1031 like-kind exchanges. Our communities will be severely impacted if we do not take action to preserve IRS Section 1031.

How can I help?

Submit a letter to congress
Spread the word! Talk to those around you about this issue and why it matters

Section 1031 impacts the growth of our communities.’ Support Section 1031 today! #Revolutionize1031

The 1031 Exchange Hybrid Solution - Combining Forward and Reverse Exchanges

Anonymous — Thu, 20 May 2021 17:12:11 +0000

The 1031 Exchange Hybrid Solution - Combining Forward and Reverse Exchanges

Anonymous (not verified) Thu, 05/20/2021 - 17:12

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The 1031 Exchange Hybrid Solution - Combining Forward and Reverse Exchanges

Most Section 1031 Like-Kind Exchange transactions involve a taxpayer who sells a relinquished property and then acquires a replacement property within the appropriate guidelines. An increasing number of exchangers are structuring their transactions as 1031 reverse exchanges, wherein the taxpayer first arranges for the acquisition of the replacement property and later sells their relinquished property. But there is a hybrid solution that often is overlooked – this is a combination forward-reverse exchange.

The Situation

Karen currently owns a small strip center and has received an attractive offer to sell the property for $500,000. She also has a small office building she is trying to sell, also worth about $500,000. She was planning to sell both properties and combine the proceeds to acquire replacement property worth at least $1,000,000.

The Problem

Karen’s small strip center will close in about 45 days, but she has not yet received any offers on the office building. The fact that she has identified a suitable replacement property for which the seller has agreed to accept $1,000,000 if she can close in 60 days further complicates matters. With the office building being under contract and not yet the subject of negotiations, she is worried about how to accomplish her 1031 exchange goals.

The Solution: A Combination Forward-Reverse Hybrid 1031 Exchange

Karen will structure the sale of her small strip center as part of a Section 1031 Like-Kind Exchange. After consultation with her attorney and Accruit as the Qualified Intermediary (“QI”), Karen understands both the forward 1031 exchange and reverse 1031 exchanges process.

The sale of the strip center took place on March 1, 2021, and the exchange proceeds were sent directly to Accruit, the qualified intermediary, to be held on her behalf until the purchase of her replacement property. This is necessary because a taxpayer participating in a like-kind exchange cannot be in actual or constructive receipt of the net sale proceeds while the exchange is pending.

Within 45 days after the closing on the sale, Karen identified a one-half interest in her target replacement property using Identification Rules in 1031 Exchanges. Karen also worked closely with the qualified intermediary, Accruit, to begin the reverse exchange component of her transaction. Accruit, through its affiliate, known as an Exchange Accommodation Titleholder (“EAT”) will take title to the other one-half interest in Karen’s target replacement property.

Specifically, Karen will lend the additional $500,000 to a new LLC (let us call it Newco LLC), with the EAT as its sole member, which was established specifically for the purpose of facilitating the reverse 1031 exchange. The loan from Karen to Newco LLC will be documented by a note and secured with a pledge of the EAT’s membership interest in Newco LLC.

Karen ultimately closes on the acquisition of the target replacement property on April 30, 2021, with title vested 50% in her personal name and 50% in Newco LLC, as tenants in common. (Learn more about Tenants in Common.) On June 1, 2021, while the replacement property is held by Karen and Newco, Karen enters a contract to sell the small office building, her second relinquished property, for $540,000, with a closing date of August 20, 2021. At closing, after all closing costs are paid, the net proceeds of $500,000 will be deposited into Karen’s exchange account with Accruit. Karen will acquire the remaining 50% tenancy in common interest from the EAT and will direct Accruit to transfer the funds from the exchange account to the closing agent for this portion of the transaction. Immediately Upon receipt of those funds the EAT will direct the closing agent to remit that sum to Karen to pay off the loan that was made to the EAT to acquire the new property. Upon payoff of the $500,000 loan owed to Karen, Karen receives full ownership of the replacement property. In this manner it is the same as if Karen had acquired the replacement property outright from seller.

The Result

Karen used the forward exchange for the sale of the strip center and the reverse exchange for the sale of the office building to ultimately acquire 100% of the new building, deferring the taxes on both sales in the process. In doing so, Karen exchanged from two properties worth approximately $1,000,000 into a single, more desirable building worth about the same.

The Myth of the 1031 Exchange Cooperation Clause

Anonymous — Mon, 19 Oct 2020 15:08:19 +0000

The Myth of the 1031 Exchange Cooperation Clause

Anonymous (not verified) Mon, 10/19/2020 - 15:08

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The Myth of the 1031 Exchange Cooperation Clause

In this post, we will take a brief look into the evolution of Section 1031 to show why it was critical along the way to make use of an “Exchange Cooperation Clause” and why, as the rules changed over time, such use is no longer necessary.

The Starker case

Section 1031 made its way into the Tax Code in 1921, nearly a hundred years ago. At that time, until the mid-1980s, the sale and purchase were thought to need to take place “simultaneously”, after all, isn’t that the commonsense definition of a trade between two people? Apparently not. Beginning in the late 1970s and continuing into the mid-1980s, in the landmark case of Starker vs. U.S., it was determined by a Federal District Court in California that there did not appear to be any requirement in the plain language of Section 1031 of simultaneity.

“No gain or loss is recognized if property held for productive use in a trade or business or for investment is exchanged solely for property of a like kind to be held either for productive use in a trade or business or for investment”.

This seemingly innocuous ruling opened up a Pandora’s Box of opportunity, not to mention confusion. The period of time for completing the trade with his buyer in the Starker case was five years. In 1986, shortly after the decision came out, Congress chose a legislative fix. It agreed that Section 1031 did not require the exchange of the properties to take place at the same time but decided to limit the open ended duration to complete the trade of the one for the other to 180 days. Essentially that limited time period still allowed the two transactions to be close enough in time to be considered to be tied to one another. But anything of a longer period simply broke the link between the sale and the purchase into unrelated (for tax purposes) transactions.

Identification and purchase period to qualify for 1031 exchange

As for the opportunity presented, taxpayers had 45 days to identify potential properties and 180 days to close on one or more of the properties designated. This was much easier than trying to pull together a sale and a purchase at the same time. Instead of being a somewhat little used provision to defer tax, exchanges began to flourish as a result of the extended window to complete the exchange.

But practical problems abounded. One of the biggest problems was what to do with the buyer’s funds during the interim period between the sale and purchase? Section 1031 still required an actual exchange between the taxpayer and the buyer. If the seller took the funds and applied them within 180 days, that was not sufficient. The moment the taxpayer received the funds, the matter became a taxable sale whether or not new property was acquired within the time limits. It was not akin to the old rules where you could get deferral on the sale of a personal residence if you bought a new one within two years. One solution was to allow the buyer to retain the funds with the contractual obligation to use them to buy the new property once the seller was ready to do so. That has so much obvious risk that it doesn’t have to be explained.

Creative lawyers at the time came up with an effective solution. Keep the exchange relationship open between the taxpayer and buyer but place the buyer’s purchase price into a trust account with a third party to keep it out of the taxpayer’s receipt. This also had the benefit of keeping it out of the buyer’s possession or control. A name quickly followed for this procedure and it was affectionately called a Starker Trust!

Now we are getting close to the point of this blog. Starker Trusts could be fifteen pages long and filled with legalese. From the buyer’s standpoint, he or she saw the property listed for sale and negotiated a deal. The buyer came to closing with the applicable funds. However, in the case of a seller doing an exchange, at closing the seller (or seller’s lawyer) would ask the buyer to enter into the Starker Trust for the seller’s benefit. But the buyer would often balk. Sometimes there was simply bad blood between the parties by the time of closing. Other times buyers were reluctant generally to get involved in a tax matter that did not otherwise involve them. It was not unusual for the buyer to agree only if the buyer’s lawyer read and approved it and the seller agreed to pay the attorney fees.

What is an Exchange Cooperation Clause?

The only way the seller could obligate the buyer to sign the necessary agreement was to provide for that buyer’s obligation in the body of the purchase/sale agreement. Hence a clause began appearing in contracts for this purpose requiring the buyer to execute the Starker Trust agreement. That became know as the Exchange Cooperation Clause and it was good policy at the time.

In regard to the Pandora’s Box mentioned above, many unresolved issues arose pertaining what could, and could not, be done for a seller to attain exchange status. These included such issues as:

Who could retain the benefit of the interest accrued on the Starker Trust deposit
Who was eligible to hold the funds in the Starker Trust
Were there other ways to secure the buyer’s obligation to provide replacement property to the taxpayer
If the taxpayer picked out new property for the buyer to acquire to trade back to the taxpayer, did the buyer have to come into the chain of title

Where does the Qualified Intermediary come in?

In response to these questions and many more, in 1991, the 1031 Treasury Regulations were issued to provide some guidance. At the heart of the Regulations was the introduction of a new player within the exchange, namely the Intermediary. Certain persons in an agency relationship with the taxpayer were “disqualified” from acting as the intermediary but anyone else was deemed “qualified”. Hence the term Qualified Intermediary (QI) came into being. This is what gave rise to the many exchange companies, such as Accruit, that exist today.

The main function of the QI was to stand in the shoes of the buyer as a party with whom the taxpayer could effectuate an exchange. Through a series of steps set forth in the regulations, for tax purposes, the taxpayer was selling to the QI (who caused the property to go the buyer) and the QI acquired replacement property from the seller and transferred it to the taxpayer. As a result, an exchange was deemed to have taken place between the taxpayer and the QI. So, the buyer was not a party to the seller’s exchange transaction and had no need to cooperate. The regulations also set up several options in regard to holding the funds during the transaction including letting the QI hold them. This is what is typically done in an exchange today.

Is an Exchange Cooperation Clause necessary?

So, for nearly thirty years, there has been no requirement for the buyer to cooperate in the seller’s tax transaction, but old habits die hard. In today’s world, due to the series of steps referred to above, the seller does have to assign the rights under the sale contract to the QI and notify the fact of this limited assignment to the parties to the contract. The parties receiving the written notice (mainly the buyer and later the seller) are not required to agree, cooperate or even to sign acknowledging receipt. They often sign receipt as a courtesy, but it is not required by the regulations. The same thing must be done with regard to the replacement property contract. This assignment in not tantamount to an outright assignment of the whole contract to a third party, rather it is just the assignment of the seller’s rights (but not the obligations) in the contract for purpose of getting tax deferral. As a matter of general law, if a contract has no restriction against assignment, and most don’t, the person has the legal right to make an assignment. However, if a contract, or state law, included a restriction on assignment, even just of the “rights” to treat it as an exchange, a counterparty in the sale or purchase agreement might be able to thwart this as a technicality. As a result, in today’s contracts, even when there is no restriction against assignment, just to be safe, a clause is usually found in the preprinted contracts or added, along the lines as follows:

“Each of the parties hereto may assign its rights (but not its obligations) to a Qualified Intermediary as defined in the IRC Code Section 1031 Treasury Regulations. Said exchange will be closed without cost, liability or delay to the non-exchange party.”

In summary, as the rules evolved under IRC Section 1031 since its inception, at one time it was very important to have a clause in the sale contract requiring the buyer to “cooperate” in the seller’s exchange transaction. One of the primary changes to the need for the buyer to participate was in the heart of the 1991 Treasury Regulations substituting in a third party, namely the Qualified Intermediary to remove the buyer from any need to cooperate. As a result, an “exchange cooperation clause” because irrelevant. To this day people tend to put emphasis on this clause because it was necessary so many years ago. In the modern era, post-1991, the only requirement for a taxpayer in this regard is to assign the rights under the contract and provide written notice of the fact. There is no requirement for the buyer to cooperate in any way.

Revive a 1031 Exchange Opportunity Through Rescission

Anonymous — Thu, 14 May 2020 20:36:44 +0000

Revive a 1031 Exchange Opportunity Through Rescission

Anonymous (not verified) Thu, 05/14/2020 - 20:36

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Revive a 1031 Exchange Opportunity Through Rescission

Often times, a 1031 qualified intermediary (QI) will receive a panicked phone call from a taxpayer who closed the sale of their relinquished property, received the sale proceeds and then realized they could have deferred substantial taxes in a Section 1031 exchange. In many of these instances there may not be an opportunity to revive the exchange, however, in some cases, the taxpayer may be able to breathe new life into what was thought to be a lost cause.

Can you do a 1031 exchange after closing?

The use of rescission has long been recognized in law generally in connection with transactions not related to 1031 exchanges. However, the Internal Revenue Service (“IRS”) has allowed the use of rescission to correct a problem with an exchange transaction. “Rescission” is not defined in the Internal Revenue Code or the Treasury Regulations, which are the source of most rules used to advise taxpayers. Rather, rescission is a concept which some courts have allowed, and the IRS has blessed, specifically in Revenue Ruling 80-58, 1980-1 C.B. 1156. The IRS has also issued private letter rulings in the past for taxpayers in specific fact patterns. There is other general authority for rescission in the case of Penn v. Robertson, 115 F2d 167, 40-2 U.S. Tax Cas. (CCH) P. 9707 (CCA 4th Cir. 1940).

As an example, consider an individual taxpayer closes the sale of a parcel of land in February 2020 for a sizable gain. The taxpayer receives the sale proceeds but later finds out they could have deferred substantial tax liability by doing a 1031 exchange. As long as the taxpayer makes the decision to rescind the transaction in the same tax-reporting period–in this example before 2020 year-end–the taxpayer can contact the buyer and they can agree to rescind the transaction. Of course, should the buyer not be willing to cooperate, or should there be a buyer’s lender who does not wish to participate, this process may not be feasible.

Seller and buyer agree to rescind. What happens next?

When a rescission is properly completed, the IRS treats the sale as if it never happened, as long as the taxpayer receives the property back from the buyer and the buyer receives the full purchase price back from the taxpayer on or before the end of the tax reporting period for the taxpayer. The parties may agree they were laboring under mutual mistake of fact or some other reason for the decision to rescind. Another important consideration is when the rescission of the transaction is complete, the parties should have no further obligations to each other to take any further action. If these criteria are met, pursuant to the authorities cited above, the parties are in the exact position they were prior to the sale. The taxpayer and the buyer can then undertake another sale and purchase transaction and close the transaction with the participation of a QI company, like Accruit, receiving the exchange proceeds so it can help process the taxpayer’s 1031 exchange. In order to ease the burden on the buyer during rescission, it may be helpful if the taxpayer agrees to pay for any buyer expenses incurred in accommodating the taxpayer.

Typically, the QI company is not in a position to provide legal advice regarding the rescission process or provide any rescission agreement. There are numerous attorneys and CPA’s nationwide who are knowledgeable in this area of the law and who can help advise the taxpayer.

Do you have an uncommon situation that you have questions about? Ask our experts.

10 Steps of a Reverse Exchange

Anonymous — Thu, 01 Nov 2018 16:39:02 +0000

10 Steps of a Reverse Exchange

Anonymous (not verified) Thu, 11/01/2018 - 16:39

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10 Steps of a Reverse Exchange

View the entire 10 Steps of a Reverse Exchange Infographic.

Accruit, LLC is a national provider of 1031 Exchange Qualified Intermediary (QI) and Exchange Accommodation Titleholder (EAT) services for simple and complex exchanges. Accruit handles all types of real property like-kind exchanges. Specialized EAT services are provided by Accruit Exchange Accommodation Services LLC.

A reverse exchange is a tax-deferred exchange that enables the purchase of new (replacement) property prior to the sale of the old (relinquished) property.

Step One

The taxpayer enters into a contract to purchase the replacement property, assuring the contract has no restriction against assigning the contract to a third party. In the unlikely event that it is so restricted, the contract should be negotiated to allow the contract to be assigned to the reverse exchange accommodator, Accruit Exchange Accommodation Services (AEAS) or a special purpose entity (SPE), typically an LLC, owned by AEAS to hold title to the property. Under IRS vernacular, the SPE is known as an Exchange Accommodation Titleholder (EAT).

Step Two

The taxpayer or their advisor contacts Accruit to start an exchange and obtain a reverse exchange document package. The taxpayer and AEAS, enter into a Qualified Exchange Accommodation Agreement (QEAA) for replacement property whereby the SPE, as the EAT, will take title on the date of closing to the replacement property. The SPE is set up with AEAS as its sole member.

Step Three

The taxpayer assigns the replacement property purchase contract to the EAT.

Step Four

Unless the taxpayer is providing 100% of the necessary funds, a taxpayer selected lending bank loans the funds required for the purchase to the EAT to enable it to acquire the replacement property. The EAT signs any applicable loan documents as the borrower, however, the taxpayer signs as the guarantor of any such loan. In the event the bank does not make a 100% loan-to-value loan, the taxpayer makes a second loan for the balance needed, which should include any earnest money that may have been previously advanced. The documents required for any taxpayer loan are furnished by Accruit and typically include a Non-Recourse Promissory Note and a Pledge Agreement of Membership Interest to secure the loan.

Step Five

The taxpayer and the EAT enter into a contract for the sale of the replacement property from the SPE to the taxpayer as well as a triple net Master Lease, which allows the taxpayer to oversee the day-to-day management of the property while it is held by the EAT. The lease provides that, in lieu of rent, the taxpayer will pay all debt service to the lender and/or the taxpayer, assuming a secondary loan from the taxpayer. Accruit may request that the taxpayer execute an Environmental Indemnity Agreement.

Step Six

Funds are sent directly to the closing by the lender and/or the taxpayer. The closing takes place and the SPE takes title to the property. Evidence of liability insurance must be furnished to Accruit showing the SPE as the insured party, while the lender and the taxpayer may appear as additional insureds.

Step Seven

Within six months (180 days) of the replacement property closing, the taxpayer enters into a contract for the sale of the relinquished property and enters into a standard Tax Deferred Exchange Agreement with Accruit, who serves as the QI. The taxpayer assigns its rights (but not its obligations) under the contract for the sale of the relinquished property to the QI and gives to the buyer(s) written notice of this assignment on or before the closing. The closing must take place within the 180-day period and the net proceeds of the sale are paid to the QI.

Step Eight

The taxpayer assigns its rights under the contract for the purchase of the replacement property (which is now being acquired from the EAT) to the QI and gives written notice of this assignment to the EAT, on or before the closing.

Step Nine

The taxpayer directs the QI to disburse the exchange proceeds to the EAT as part, or all, of the purchase price. The EAT receives the funds and immediately wires those funds to the lending bank and/or to the taxpayer to pay down all or part of the debt.

Step Ten

The taxpayer takes ownership of the replacement property via an assignment of the membership interest in the EAT which transfers the LLC, and the property it holds, from the member (AEAS) to the taxpayer. Alternatively, a deed may be issued to the taxpayer by the EAT and the LLC may be dissolved. The taxpayer takes the membership interest or the deed relating to the replacement property subject to the balance of any debt.

Note: The foregoing suggested procedural outline is made available by Accruit to interested parties and to licensed attorneys and it is intended to be used as a guideline. It is not intended to be relied upon, or viewed in any way, as legal advice, and is furnished for purposes of convenience only. As a qualified intermediary, Accruit is prohibited from providing tax or legal advice. Taxpayers must seek such counsel from their advisors.

1031 Exchange Qualified Intermediary

1031 Exchange Timeline Overview and Considerations

1031 Exchange Timeline Overview and Considerations

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1031 Exchange Timeline Overview and Considerations

Forward Exchange

Reverse Exchange

Build-to-Suit or Improvement Exchange

1031 Exchange Timeline Considerations

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1031 Exchange Timeline and Identification Requirements

1031 Exchange Timeline and Identification Requirements

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1031 Exchange Timeline and Identification Requirements

Property Identification

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1031 Exchange Explained by Accruit - Your Trusted Qualified Intermediary

1031 Exchange Explained by Accruit - Your Trusted Qualified Intermediary

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1031 Exchange Explained by Accruit - Your Trusted Qualified Intermediary

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Holding Periods in a 1031 Exchange

Holding Periods in a 1031 Exchange

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Holding Periods in a 1031 Exchange

1031 Exchange Related Party Rules

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1031 Exchange Explained - Top 25 FAQ's Answered by Subject Matter Experts

1031 Exchange Explained - Top 25 FAQ's Answered by Subject Matter Experts

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1031 Exchange Explained - Top 25 FAQ's Answered by Subject Matter Experts

Top 25 1031 Exchange FAQs

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Support Section 1031 Like-Kind Exchanges

Support Section 1031 Like-Kind Exchanges

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Support Section 1031 Like-Kind Exchanges

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The 1031 Exchange Hybrid Solution - Combining Forward and Reverse Exchanges

The 1031 Exchange Hybrid Solution - Combining Forward and Reverse Exchanges

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The 1031 Exchange Hybrid Solution - Combining Forward and Reverse Exchanges

The Situation

The Problem

The Solution: A Combination Forward-Reverse Hybrid 1031 Exchange

The Result

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The Myth of the 1031 Exchange Cooperation Clause

The Myth of the 1031 Exchange Cooperation Clause

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The Myth of the 1031 Exchange Cooperation Clause

The Starker case

Identification and purchase period to qualify for 1031 exchange

What is an Exchange Cooperation Clause?

Where does the Qualified Intermediary come in?

Is an Exchange Cooperation Clause necessary?

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Revive a 1031 Exchange Opportunity Through Rescission

Revive a 1031 Exchange Opportunity Through Rescission

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Revive a 1031 Exchange Opportunity Through Rescission

Can you do a 1031 exchange after closing?

Seller and buyer agree to rescind. What happens next?

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10 Steps of a Reverse Exchange

10 Steps of a Reverse Exchange

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10 Steps of a Reverse Exchange

View the entire 10 Steps of a Reverse Exchange Infographic.

Step One

Step Two

Step Three

Step Four

Step Five

Step Six

Step Seven

Step Eight

Step Nine

Step Ten

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