Under Section 1031 of the Internal Revenue Code a taxpayer may exchange property currently held for investment or productive use in a trade or business, for similar or like kind property. If the exchange of property is carried out within the rules of Section 1031 then the taxpayer will be able to defer the capital gains tax associated with the transferred property.
What is a Intermediary (Q.I.)?
Before deciding whether or not to do an exchange, the taxpayer may wish to contact an Intermediary. The Intermediary is sometimes referred to as a “Q.I.” or Qualified Intermediary. The Intermediary is an independent third party (not related) that facilitates the paper work prior to the closing of the first transaction and guides the taxpayer in their exchange. The Intermediary is not there to provide tax counsel and may not be a party that has provided agency type services within the previous two year period (Attorney, Banker, Realtor, or Accountant).
Does your Firm retain interest?
No, our firm does not retain any interest earned on exchange funds. Our fees are set prices and based upon the amount of transactions.
What is Like Kind?
Property must be exchanged for like-kind property, but the standard for like-kind is very broad. Most real property is like-kind. For example, you may sell a duplex and purchase a quad, a single family home, a hotel or vacant land, etc. However, Personal property is very different and is subject to classification and Personal Property may not be swapped for Real Property. (i.e. Real for Real and Personal for Personal).
How Long to I have to do an Exchange?
In an exchange, the taxpayer must identify the property to be replaced or relinquished with 45 days after the first transfer and must close on the property to be purchased or sold (in a reverse) within 180 days after that same first transaction. When identifying replacement properties, exchanges will generally use the “Three property Rule.” This rule allows the taxpayer to identify up to three properties regardless of their fair market value. The IRS gives no exceptions to the 180 day limit rule (no leeway for weekends or holidays).
Where will my funds be kept?
When perfecting a 1031, an Intermediary will receive funds from the sale of the relinquished property and not the taxpayer. If the taxpayer were to take “Receipt, Or, Constructive Receipt” of the funds then the transaction is seen as a sale and not an exchange. So it is of most importance that the taxpayer not be in “Receipt” of funds. Those funds are then placed in a Qualified Escrow or Trust and the taxpayer is entitled to a “growth factor” (interest). Some firms share in the interest earned during the escrow period – our policy is to give all interest earned to our client.
www.websitediner.com