A significant portion of our current and past clients, are 1031 exchange clients. We have been a part of hundreds of complete and partial exchange cycles nationwide. As a result we have developed long-term relationships with owners, investors, developers, brokers and exchange intermediaries. This allows us to easily formulate exchange scenarios and later complete the process with high client satisfaction. Due to our experience our clients are ensured to receive services tailored specifically to their particular situation.
Please feel free to read below for explanation of 1031 Exchange Process. If you would like to discuss your situation or scenario with our experts please contact our office for a free telephone consultation.
WHAT IS AN IRC 1031 TAX DEFERRED EXCHANGE?
Taxpayers have had the option of deferring the recognition of a capital gains tax by Exchanging real property, rather than engaging in a sale and subsequent purchase, since 1921. And although much has changed since then, the basic concept remains: A properly structured Tax Deferred Exchange under Section 1031 of the Internal Revenue Code of 1986, as amended, allows an owner of real property, the Exchanger, to defer the recognition of a capital gains tax normally recognized on the sale of real property, if the exchanger buys a like kind property of equal or greater value and uses all of its cash equity in the subsequent purchase. To describe the 1031 tax exchange, read below.
For example: If an investor is selling a single tenant building for $1,000,000, and has a net adjusted basis of $500,000, the investor will have a gain of $500,000 upon the sale of that building. A full capital gains tax that an investor might realize upon the sale of the property is made up of several different components. For the federal capital gains tax the investor will pay 15% tax on the amount the property has appreciated in value. The investor will also pay a tax known as depreciation recapture at the rate of 25% for the amount the property has been depreciated during its ownership. In addition, there may be a state or local capital gains tax. Many investors multiply the gain by 25% to get a rough estimate as to the amount of tax they might realize if they do not structure the transaction as an exchange. In this example the gain would be approximately $500,000. Accordingly, if we multiply this amount by 25% the estimated capital gains tax if this sale were not structured as an exchange would be $125,000.
If this 1031 property transaction were structured as an exchange, the $125,000 could be applied toward the purchase of a new like kind property.
WHAT IS A COMPLETE 1031 EXCHANGE CYCLE?
A complete cycle is where we assist the client through the entire 1031 exchange process. The process generally follows the following pattern:
- Evaluation of the current property
- Preparation of exchange scenarios/properties based on net gains from sale
- Listing, marketing and closing the current property.
- Assisting in selecting a qualified intermediary
- Searching and finding the exchange property
- Procuring the offer, guiding through new transaction, assisting with due diligence, title and escrow
- Closing and completing the exchange.
WHAT IS A PARTIAL 1031 EXCHANGE CYCLE?
A partial cycle is where we only represent the client in one portion of the transaction. Most often we are brought on to find a suitable exchange property once the current one has already been sold.
WHAT IS A QUALIFIED INTERMEDIARY?
A Qualified Intermediary is an independent third party to the transaction whose function is to prepare the documents necessary to create the exchange, as well as to act as the independent escrow agent for the exchange funds. The Qualified Intermediary is defined by the Treasury Regulations and may not give tax or legal advice.
A Qualified Intermediary may not be a “disqualified person” as further defined in the Treasury Regulations. A disqualified person normally includes, but is not limited to, your attorney, CPA or accountant, realtor, agents, employees, relatives, and entities in which you have an interest. A Qualified Intermediary should also be someone with the knowledge and experience to prepare the exchange documents and work with your tax and/or legal advisor; able to provide you with a copy of their Fidelity Bond and Errors & Omissions policy; and provide you with good service.