Ans: A tax-deferred exchange, better known as Delayed 1031 exchange requires the taxpayer to dispose off the investment property and acquire the replacement property. It allows the traders the freedom to perform the property related transactions on different dates.
Q2: How is a Delayed Exchange beneficial?
Ans: It helps the taxpayers to defer the federal capital gains taxes, state taxes in several states, as well as depreciation recapture. Additionally, it allows the traders to reinvest the sales proceeds instead of paying it to the government as taxes.
Q3: What is the maximum time limit to complete the delayed exchange?
Ans: The timeline set by the United States Internal Revenue Code Section 1031 or the IRS for Delayed exchange to complete is 180 days.
Q4: What is the maximum time limit to identify the replacement property under delayed exchange?
Ans: The Codes and Regulations allows the taxpayers to identify the replacement property within 45 days from the date of transfer of relinquished property.
Q5: What are the different types of 1031 delayed exchange rules?
Ans: The delayed exchange allows the traders to identify one or more potential replacement property under three different rules:
Three-property rule
200% of Fair Market Value rule
95% rule
Q6: What is a Three-property rule?
Ans: It allows the taxpayers to identify at the most three potential like-kind replacement properties. It sets no restriction on the market value of the identified like-kind replacement properties. This delayed exchange rule is the most common and simple one of all the identification rules.
Q7: What is like-kind property?
Ans: Any property that is considered as a real property under the Federal or the State law qualifies to be a “like-kind” property and hence can be used for IRS 1031 delayed exchange.
Q8: Which real property can be considered as “like-kind’?
Ans: There are several examples of like-kind property, such as a commercial building that can be exchanged for an apartment flat, any tangible property such as automobile, equipment, or any intangible property like trademarks, copyrights, franchises, and so on. However, a property inside the United States is not “like-kind” to a property placed somewhere outside the United States.
Q9: What is 200% rule?
Ans: In this rule, the number of potential like-kind replacement properties to be identified may exceed three, provided that all the identified properties have a total fair market value (FMV) less than 200% of the sales price of the relinquished property.
Q10: What is 95% Exception Rule?
Ans: If a trader identifies like-kind replacement properties that exceed both the above two rules, i.e., Three Property rule and 200% rule, even then the identification can be considered liable for 1031 delayed exchange under 95% rule. It requires the trader to acquire at least 95% of the FMV of the identified replacement property.
Q11: What is the first step for doing a delayed 1031 exchange?
Ans: In order to do defer the capital gains taxes using a delayed 1031 exchange, the taxpayers should first enter into a contract with the buyer regarding the sale of relinquished property. It should include “cooperation clause” that asks the buyer to cooperate in making the transaction look like a deferred exchange.
Q12: What is the role of delayed 1031 exchange companies?
Ans: Delayed 1031 exchange firms help significantly in the tax-deferred exchange process, especially in the documentation related work that the trader needs to disclose before the closing date.
Q13: Which relinquished property documents are necessary for delayed 1031 exchange of properties?
Ans: The delayed exchanged firms usually help the taxpayers in preparing:
Assignment of the Relinquished Property Purchase Contract to assign the rights of seller to the Qualified Intermediary
Exchange Agreement
Notice of the Assignment to be delivered to the to the buyer
Necessary instruction to accomplish the transaction to the settlement agent
Q14: When is the right time for the trader to identify the replacement property?
Ans: After the relinquished property is closed, the exchange firm holds the proceeds and ask the taxpayer to identify suitable “like-kind” replacement property within the identification period of 45 days.
Q15: What is the next step after the taxpayer identified a like-kind replacement property?
Ans: The trader enters into a ‘Purchase contract’ with the seller of the replacement property. This contract should include a ‘cooperation clause’ that obligates the seller to cooperate in the former’s cause of completing the tax-deferred exchange.
Q16: What documents are required to complete the replacement property exchange?
Ans: The delayed 1031 exchange companies prepare several documents on behalf of the buyer such as ‘Assignment of the Replacement Property Purchase Contract’, ‘Notice of the Assignment’, and instructions to complete the transaction the settlement agent. All these documents must be signed on or before the closing date. The closing should take place within the exchange timeline of 180 days.
Q17: Which documents are necessary to report the transaction as a delayed 1031 exchange?
Ans: The delayed exchange firms provide the traders with several documents at the time of the completion of the exchange, such as the copy of property exchange documents, which also includes the document to show the receipt and delivery of the exchange funds.
At Triple Net Investment Group we can assist you in locating a like-kind property for a 1031 exchange and ensure a smooth and successful transaction.
