"We Are Qualified"
D.W. Moore & Associates, Inc. can assist in various types of exchange transactions for you, and has the expertise and qualifications to provide the required services for a 1031 Exchange, as an IRS qualified intermediary.
A tax-deferred exchange is a transaction wherein an "investment" property is replaced with another investment property. The IRS uses the term "relinquished" property to refer to the property which is being disposed of, while the property being received is called the "replacement" property. The transaction is basically a sale and purchase transaction, except that there needs to be certain steps and documentation completed.
Under normal circumstances, the sale of real property may result in a tax event. When certain criteria are met, as defined in the IRS Code Section 1031, the taxes on any capital gain realized from the sale on the relinquished property are deferred. The structure of this exchange transaction is strictly defined, any deviation may result in a tax liability. Section 1031of the IRS Code extends an exemption to the requirement of recognizing any loss or gain fom the sale of real property. This avoidance of paying taxes is a deferral not an avoidanve of the realized tax.
There are different kinds of exchanges. Normally the standard kind of exchanged used or discussed is a deferred, or Staker exchange. In as much as the majority of exchanges are delayed, it is important to consider two basic rules to fully defer taxes on the gain realized from the sale of the relinquished property.
- 1. The purchase price of the replacement property must be equal to or greater than the net sale price of the relinquished property.
- 2. All equity (sales proceeds) received from the sale of the relinquished property must be used to acquire the replacement property.
- 3. Property that qualifies for exchange under the IRS Code Section 1031 must be "like kind", which is defined in the Code as follows:
- A. Property held for productive use in a trade or business, such as income property, or
- B. Property held for investment.
The Need for a Qualified Intermediary
The IRS Code provides for a "safe harbor" to accomplish an exchange. One of the safe harbors recognized is that of a qualified intermediary. Under an exchange, the exchanger is not allowed to take, hold, or control any funds realized from the transaction. This safe harbor concept allows the exchanger to use a third person to hold the funds recognized in the transaction. Except for the State of Nevada, there are no state nor federal regulation of the intermediary.
Under rules of the Internal Revenue Service, a qualified intermediary must:
- Not be the taxpayer or a related party, as defined by the rule, and
- Act to facilitate the deferred exchange, for a fee, by agreeing in writing with the taxpayer to acquire the relinquished property from, and acquire the replacement property for the taxpayer.
One of the major concerns in finding a qualified intermediary is the "not related party" requirement. If the intermediary is not qualified, being a related party, then the fund received by them may constitute a "constructive receipt" by the taxpayer and therefore may result in an unsuccessful (taxable) transaction. Any party that has an agency relationship with the taxpayer is usually defined as a related party. This agency relationship would include an attorney, accountant, real estate agent, or escrow agent.
1. Exchange Agreement -- Usually the first step in a delayed exchange is the execution of an exchange agreement between the taxpayer (exchanger) and the qualified intermediary, this agreement consists of the agreements of the parties, and sets forth the concept that a deferred exchange is being contemplated.
2. Transaction Requirements -- Once the exchange agreement is executed, then the sales transaction of the relinquished property is accomplished. The sales transaction may be completed with a substitution agreement which allows for a "direct deeding" from the taxpayer (seller-exchanger) to the buyer. However, the intermediary must be involved in the transaction and their instructions need to be followed.
3. Time Constraints -- After the sale of the relinquished property, the taxpayer must comply with a very strict time frame. Within 45 days from the time of the sale, the taxpayer must notify, in writing, the qualified intermediary about the property that is going to be acquired. Also, within the 180 days from the time of the sale, the purchase of the replacement property must be accomplished.
4. Identification -- For the exchange to qualify, the identification of the replacement property is controlled by three rules.
- THE THREE PROPERTY RULE -- allows the taxpayer to identify up to three properties of any value, one or more of which must be acquired within the 180 day acquisition period
- THE TWO HUNDRED PERCENT RULE -- allows that if three or more properties are identified, the total (aggregate) market value of all the properties may not exceed 200% of the vale of the relinquished property.
- THE NINETY-FIVE PERCENT EXCEPTION -- allows that in the event that the other rules do not apply, if the replacement property being acquired represents at least 95% of the total (aggregate) value of the property identified.
At the conclusion of the exchange, D.W. Moore & Associates, Inc. will provide a complete accounting of its involvement in the exchange.