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1031 exchange
A 1031 exchange allows investors to defer capital gains taxes by exchanging one investment property for another like-kind property. Key requirements include using a qualified intermediary to avoid direct receipt of sale proceeds, identifying replacement property within 45 days, and completing the purchase within 180 days. Following the strict rules of Section 1031 can help investors defer taxes and successfully complete a tax-deferred real estate exchange.
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1031 exchange
- 1. 1031 EXCHANGE RAMSEYA. BAHRAWY, ESQ. 01/04/13 11
- 2. WHAT IS IT? • A TAX DEFERRED EXCHANGE AUTHORIZED AND DEFINED BY SECTION 1031 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED. • 1031 EXCHANGE DEFERS TAXES DOES NOT ELIMINATE TAXES 01/04/13 2
- 3. LANGUAGE OF IRC SECTION 1031 • NO GAIN OR LOSS SHALL BE RECOGNIZED ON THE EXCHANGE • OF PROPERTY HELD FOR PRODUCTIVE USE IN A TRADE OR BUSINESS OR FOR INVESTMENT 01/04/13 3
- 4. LANGUAGE OF IRC SECTION 1031 • IF SUCH PROPERTY IS EXCHANGED SOLELY FOR PROPERTY OF LIKE KIND • WHICH IS TO BE HELD EITHER FOR PRODUCTIVE USE IN A TRADE OR BUSINESS FOR INVESTMENT. 4 01/04/13
- 5. EXCHANGE TERMS • EXCHANGER • RELINQUISHED PROPERTY • INVESTMENT PROPERTY • REPLACEMENT PROPERTY • LIKE KIND PROPERTY • IDENTIFICATION PERIOD 01/04/13 5
- 6. EXCHANGE TERMS • IDENTIFICATION• CONSTRUCTIVE LIST RECEIPT • EXCHANGE • SAFE HARBOR PERIOD 01/04/13 6
- 7. WHAT IS SAFEHARBOR? • PROCESS TO AVOID ACTUAL OR CONSTRUCTIVE RECEIPT OF MONEY • MOST COMMON SAFE HARBOR IS THE QUALIFIED 01/04/13 INTERMEDIARY 7
- 8. KEYS TO ASUCCESSFUL EXCHANGE • EXCHANGER SELLS RELINQUISHED PROPERTY WHICH WAS USED FOR BUSINESS OR INVESTMENT PURPOSE • CONSIDER CONVERSION 01/04/13 8
- 9. KEYS TO ASUCCESSFUL EXCHANGE • EXCHANGER MUST ACQUIRE LIKE KIND REPLACEMENT PROPERTY. 01/04/13 9
- 10. KEYS CONT’D •EXCHANGER CAN NOT RECEIVE OR CONTROL THE PROCEEDS OR OTHER BENEFITS. • ALL NET EQUITY TRANS- FERRED TO RELINQUISHED PROPERTY 01/04/13 10
- 11. KEYS, CONT’D • RELACEMENT PROPERTY MUST BE OF SAME OR GREATER VALUE AS RELINQUISHED PROPERTY. 01/04/13 11
- 12. KEYS, CONT’D •ADD EXCHANGE COOPERATION CLAUSE TO P&S; • EXCHANGE AGREEMENT WITH QUALIFIED INTERMEDIARY PRIOR TO CLOSING ON RELINQUISHED PROPERTY. 01/04/13 12
- 13. WHAT IS LIKEKIND PROPERTY • LIVESTOCK • REALTY • MOTOR • FURNITURE VEHICLES • AIRCRAFT • BOATS 01/04/13 13
- 14. EXAMPLES: EXCHANGE OF LIKE KIND REALTY • VACANT LAND • 2 FAMILY FOR FOR RETAIL IMPROVED PROPERTY LAND • CONDO FOR • 1 FAMILY FOR INDUSTRIAL OFFICE PROPERTY BUILDING 01/04/13 14
- 15. WHAT PROPERTY IS EXCLUDED FROM A LIKE KIND EXCHANGE • STOCK IN • NOTES TRADE • BONDS & • INVENTORY SECURITIES • SHARES OF • INTERESTS IN STOCK PARTNERSHIP 01/04/13 15
- 16. CONTROL VIOLATES IRC SECTION 1031 • TO AVOID ISSUES OF CONTROL CERTAIN PERSONS ARE EXCLUDED FROM ACTING FOR AN EXCHANGER – “RELATED PARTIES” 01/04/13 16
- 17. CONTROL VIOLATES IRC SECTION 1031 CONT’D – EMPLOYEE; ATTORNEY; REAL ESTATE BROKER OR AGENT; ACCOUNTANT; INVESTMENT BANK OR BROKER - 2 YEARS PRIOR TO TRANSFER. 01/04/13 17
- 18. CONTROL VIOLATES IRC SECTION 1031 CONT’D – EXCEPTIONS: ROUTINE FINANCIAL; TRUST TITLE, INSURANCE OR ESCROW SERVICES; EXCHANGE SERVICES. 01/04/13 18
- 19. CLOSING COSTS ALLOWED IN AN EXCHANGE • BROKERS COMMISSION • DIRECT ATTORNEY FEE 01/04/13 19
- 20. CLOSING COSTS AND EXCHANGE • TITLE INSURANCE PREMIUMS • RECORDING FEES 01/04/13 20
- 21. CLOSING COSTS AND EXCHANGE • ESCROW OR CLOSING AGENT FEES • QUALIFIED INTER- MEDIARY FEES 21 01/04/13
- 22. USUAL TYPES OF EXCHANGES • DELAYED • SIMULTANEOUS 01/04/13 22
- 23. TIME LIMITS FORDELAYED EXCHANGE UNDER IRC SECTION 1031 • TIME LIMITS ARE SPECIFC AND INFLEXIBLE; 01/04/13 23
- 24. TIME LIMITS FORDELAYED EXCHANGE UNDER IRC SECTION 1031 • FROM CLOSING OF RELINQUISHED PROPERTY EXCHANGER HAS 45 DAYS TO IDENTIFY REPLACEMENT PROPERTY; 01/04/13 24
- 25. TIMELINE FOR DELAYED EXCHANGE CONT’D • IDENTIFICATION OF REPLACEMENT PROPERTY MUST BE IN WRITNG, AKA PROPERTY ID LIST. 01/04/13 25
- 26. TIMELINE FOR DELAYED EXCHANGE CONT’D • AFTER 45 DAYS THE EXCHANGER MAY NOT CHANGE THE PROPERTY IDENTIFICATION LIST; • IF EXCHANGER CHANGES LIST TAX DUE! 01/04/13 26
- 27. IRC 1031 TIMELINEFOR DELAYED EXCHANGE CONT’D • THE PURCHASE OF REPLACEMENT PROPERTY MUST BE COMPLETED WITHIN 180 DAYS AFTER THE CLOSE OF THE RELINQUISHED PROPERTY. 01/04/13 27
- 28. EXAMPLE OF TIMELINEFOR DELAYED EXCHANGE • CLOSING ON RELINQUISHED PROPERTY - MAY 9, 2006 • EXCHANGER HAS 45 DAYS OR UNTIL JUNE 22, 2006 TO IDENTIFY A REPLACMENT PROPERTY IN WRITING. 01/04/13 28
- 29. EXAMPLE OF TIMELINEFOR DELAYED EXCHANGE • CLOSING ON REPLACEMENT PROPERTY MUST OCCUR NO LATER THAN- NOVEMBER 8, 2006 (180 DAYS FROM MAY 9, 2006 ). 01/04/13 29
- 30. EXCHANGE & TITLE • RELINQUISHED & RELACEMENT PROPERTY MUST HAVE SAME TITLE • A CHANGE IN TITLE DEFEATS TAX DEFERAL 01/04/13 30
- 31. EXAMPLES OF TITLE • ABC TRUST RELINQUISHES ABC TRUST MUST ACQUIRE • JOHN JONES, AN INDIVIDUAL RELINQUISHES JOHN JONES, AN INDIVIDUAL, MUST ACQUIRE. 01/04/13 31
- 32. EXCHANGE & TITLE • A LENDER MAY REQUIRE A TITLE CHANGE BY ADDING A SPOUSE OR MOVINGTITLE TO AN INDIVIDUAL NAME FROM AN ENTITY NAME. 01/04/13 32
- 33. ADDITIONAL TECHNICALITIES • LLP, LLC • MIXED USE – CAN NOT TAKE – EXCHANGE ADVANTAGE ONLY VALID OF EXCHANGE FOR BUSINESS UNLESS LLC USE PORTION OR LLP OWNS 100% OF THE INVESTMENT 01/04/13 33
- 34. ADDITIONAL TECHNICALITIES • VACATION & • IDENTIFICATION SECOND HOMES – IF PROPERTY – EXCHANGER DOES NOT PERMITTED TO PRODUCE IDENTIFY 3 CURRENT PROPERTIES INCOME DOES OF UNLIMITED NOT QUALIFY VALUE 01/04/13 34
- 35. ADDITIONAL TECHNICALITIES • IDENTIFICATION OF MORE THAN 3 PROPERTIES – TOTAL FAIR MARKET VALUE OF PROPERTY BEING IDENTIFIED CANNOT EXCEED 200% OF FAIR MARKET VALUE OF THE RELINQUISHED PROPERTY 01/04/13 35
- 36. EXCHANGE SCENARIOS EXAMPLES • RELINQUISHED • REPLACEMENT • VALUE - $200,000 • $350,000.00 • MTG - $100,000 • $250,000.00 • EQUITY - $100,000 • $100,000.00 01/04/13 36
- 37. EXCHANGE SCENARIOS EXAMPLES • RELINQUISHED • REPLACEMENT • VALUE - $200,000 • $350,000.00 • MTG - $100,000 • $260,000.00 • EQUITY - $100,000 • $ 90,000.00 • $10,000.00 TAXABLE 01/04/13 37
- 38. EXCHANGE SCENARIOS EXAMPLES • RELINQUISHED • REPLACEMENT • VALUE - $200,000 • $200,000.00 • MTG - $100,000 • $ 80,000.00 • EQUITY - $100,000 • $120,000.00 • $20,000.00 TAXABLE 01/04/13 38
- 39. CONCLUSION TAX SAVINGS DETERMINED BY KNOWING/FOLLOWING THE RULES. • PROFESSIONAL TEAM CONCEPT - IMPORTANT TO CONSULT WITH YOU LEGAL AND FINANCIAL PROFESSIONALS; • ENLIST AN EXPERIENCED INTERMEDIARY TO SUCCESSFULLY COMPLETE THE TRANSACTION. 01/04/13 39
- 40. REVIEW • ARRANGE FOR SALE OF PROPERTY AND INCLUDE EXCHANGE LANGUAGE IN P&S • SIGN AGREEMENT WITH QUALIFIED INTERMEDIARY • SIGN OVER DEED TO Q.I. 01/04/13 40
- 41. REVIEW • AT CLOSING NET SALE PROCEEDS PAID TO QI • WITHIN 45 DAYS IDENTIFY PROPERTY OF LIKE KIND TO BE ACQUIRED 01/04/13 41
- 42. REVIEW • WITHIN 180 DAYS OF SALE PURCHASE ONE OF THE PROPERTIES ON THE IDENTIFICATION LIST AND COMPLETE THE EXCHANGE. 01/04/13 42
- 43. 01/04/13 43
Editor's Notes
- #2 Frequently, presenters must deliver material of a technical nature to an audience unfamiliar with the topic or vocabulary. The material may be complex or heavy with detail. To present technical material effectively, use the following guidelines from Dale Carnegie Training®. Consider the amount of time available and prepare to organize your material. Narrow your topic. Divide your presentation into clear segments. Follow a logical progression. Maintain your focus throughout. Close the presentation with a summary, repetition of the key steps, or a logical conclusion. Keep your audience in mind at all times. For example, be sure data is clear and information is relevant. Keep the level of detail and vocabulary appropriate for the audience. Use visuals to support key points or steps. Keep alert to the needs of your listeners, and you will have a more receptive audience.
- #3 Determine the best close for your audience and your presentation. Close with a summary; offer options; recommend a strategy; suggest a plan; set a goal. Keep your focus throughout your presentation, and you will more likely achieve your purpose.
- #4 If you have several points, steps, or key ideas use multiple slides. Determine if your audience is to understand a new idea, learn a process, or receive greater depth to a familiar concept. Back up each point with adequate explanation. As appropriate, supplement your presentation with technical support data in hard copy or on disc, e-mail, or the Internet. Develop each point adequately to communicate with your audience.
- #9 In your opening, establish the relevancy of the topic to the audience. Give a brief preview of the presentation and establish value for the listeners. Take into account your audience’s interest and expertise in the topic when choosing your vocabulary, examples, and illustrations. Focus on the importance of the topic to your audience, and you will have more attentive listeners.
- #10 In your opening, establish the relevancy of the topic to the audience. Give a brief preview of the presentation and establish value for the listeners. Take into account your audience’s interest and expertise in the topic when choosing your vocabulary, examples, and illustrations. Focus on the importance of the topic to your audience, and you will have more attentive listeners.
- #44 Determine the best close for your audience and your presentation. Close with a summary; offer options; recommend a strategy; suggest a plan; set a goal. Keep your focus throughout your presentation, and you will more likely achieve your purpose.