What is a 1031 Tax Deferred Exchange? If real estate is held for use by a business or held for investment, when it is sold, income taxes must be paid on any gain realized from the sale. However, if instead of selling the property, it is exchanged for other business or investment property, no gain is attributed to the transaction, and as a result, no gains taxes are due.
The Diamond Law Group routinely works with Qualified Intermediaries in tax deferred exchanges. A qualified intermediary assists in completing the exchange transaction.
Tax deferred exchanges can only be used if the transaction meets very strict requirements. A brief outline of those requirements is set forth below. If you are still not sure how to make use of an exchange, or would like to know more, please Contact Us and one of the attorneys would be glad to discuss it with you.
Requirements for a 1031 Tax Deferred Exchange
1. Qualified Property: The real estate to be exchanged must be held for productive use in a trade or business, or be held as an investment. This means that the property you are giving up (referred to as the “Relinquished” property) and the one you are getting in exchange (referred to as the “Replacement” property) must both be qualified property.
2. Time Requirements:
- 45 Days from Closing on the Relinquished Property: Within 45 days after the closing on the sale of the relinquished property, you must provide the qualified intermediary, with a written statement properly identifying the replacement property you wish to acquire. You can identify more than one property, but you should not identify more than three.
- 180 Days from Closing on the Relinquished Property: Within 180 days after the closing on the sale of the relinquished property, (or within 135 days after the 45 day identification period referred to above has ended) you must complete the closing on the purchase of one of the properties previously identified as a replacement property.
3. The Qualified Intermediary: Utilizing the services of a Qualified Intermediary is necessary to realize the benefits of a tax deferred exchange. The seller of the real estate (referred to as the “Exchangor“) must assign to the qualified intermediary their interest as seller of the relinquished property and their interest as buyer of the replacement property. The proceeds of the sale of the relinquished property must be paid directly to the qualified intermediary who holds the funds until they are used to purchase the replacement property. It is imperative that the Exchangor, (the seller) not receive any of the funds from the sale. While it is permitted that the down payment on signing the contract can be held by the seller’s attorney, once title to the relinquished property has been transferred, all proceeds of the sale must be paid to the qualified intermediary, including the funds received as the down payment. When the Exchangor is ready to purchase the replacement property, the qualified intermediary pays the funds to the seller of the replacement property and title to the replacement property put in the name of the Exchangor.
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