Introduction
- Background of Real Estate Exchanges
Internal Revenue Code Section
1031 provides that capital gains taxes are deferred when business or
investment real estate is exchanged rather than sold. Under Section
1031, the exchange may be simultaneous or delayed. In a delayed exchange,
the property the taxpayer ("Exchangor") desires to exchange is conveyed
before the replacement property is acquired. To achieve favorable tax
treatment, the structure of a delayed exchange must comply with the
requirements of Section 1031, including the identification and acquisition
of the replacement property within strict time deadlines, as discussed
in more detail below.
A sale of business or investment
real estate followed by reinvestment in real estate does not
qualify as an exchange under Section 1031, and exchange transactions
must be structured carefully to prevent characterization as a taxable
sale and purchase. Regulations issued by the Internal Revenue Service
provide detailed requirements for delayed and simultaneous exchanges
under Section 1031.
Preferred Approach
- The Qualified Intermediary
The I.R.S. Regulations provide
a "safe harbor" procedure for delayed or simultaneous exchanges using
a "qualified intermediary" as an independent party to acquire and convey
each property involved in the exchange transaction. Experienced lawyers
and other professional tax advisors agree that complying with the qualified
intermediary "safe harbor" will insure that a delayed or simultaneous
exchange will qualify for tax deferred treatment under Section 1031.
National 1031 Exchange Service,
LLC ("National 1031") will participate as a qualified intermediary anywhere
in the United States. The participation of National 1031 in an exchange
assures that the procedural requirements of Section 1031 and the I.R.S.
Regulations will be satisfied, and that complications which could jeopardize
favorable tax treatment will be anticipated and handled. In addition,
National 1031 works with Exchangors and their tax advisors to accommodate
special transactions, such as "Reverse"
and "Improvement" exchanges.
The Role of a
Qualified Intermediary
In a delayed exchange, after
an Exchangor contracts to sell his or her property the Exchangor and
National 1031 enter into a comprehensive exchange agreement detailing
National 1031's obligations as a qualified intermediary. The contract
to sell the Exchangor's property is assigned to National 1031 who completes
the sale of the property to the buyer under the terms of the contract.
Legal title to the property is conveyed directly to the buyer by the
Exchangor.
Proceeds of the sale are
paid to National 1031 and held in an institutional depository on behalf
of the Exchangor. After the Exchangor identifies and contracts to acquire
replacement property, the contract to buy such property is assigned
to National 1031. National 1031 acquires the replacement property on
the terms negotiated by the Exchangor using the proceeds from the sale
of the Exchangor's property and, if necessary, with proceeds from a
purchase money loan to the Exchangor and/or additional cash from the
Exchangor. Title to the replacement property is deeded directly from
the seller to the Exchangor.
Security of Exchange
Proceeds. The security of funds and property held by the
Qualified Intermediary is always a concern for Exchangors and their
advisors. The principals of National 1031 have accommodated hundreds
of exchanges for over a decade, involving properties valued in the hundreds
of millions of dollars each year. Further, National 1031's clients are
insured against loss from dishonest acts such as embezzlement, fraud
and theft by a Fidelity
Bond underwritten by the CNA Insurance Companies to a limit of $500,000
per occurrence. Finally, National 1031's procedures incorporate the
most stringent of internal controls on the handling of client funds
to ensure the greatest degree of both safety and confidentiality.
All exchange proceeds held
by National 1031 are fully deposit insured by a combination of FDIC,
SPIC and private insurance coverages. When requested, National 1031
will cooperate with an Exchangor and his or her advisors to make special
arrangements to provide additional security for exchange proceeds held
by National 1031 without jeopardizing the desired favorable tax treatment.
In addition, as a member
in good standing of the Federation of Exchange Accommodators ("FEA"),
National 1031 is obligated to adhere to the FEA's stringent Code of
Ethics. The standards of conduct set forth by the FEA ensure all clients
of National 1031 that their transactions are handled professionally
and with the highest degree of integrity. Business, professional and
financial references are also available upon request. Please
refer to About Us for more information on bonding,
deposit insurance and our company.
Documentation.
As qualified intermediary, National 1031 prepares the exchange agreement,
assignments of contracts, closing instructions and other necessary documents
for an exchange in compliance with the requirements of the I.R.S. Regulations.
All documents used by National 1031 have been drafted by experienced
tax and real estate legal counsel, and are reviewed and updated regularly.
Independent Tax
Advice. The I.R.S. Regulations restrict a qualified intermediary
from also acting as the Exchangor's tax advisor, lawyer or real estate
broker. Further, because of the complexity inherent in many exchanges,
it is often advisable that an Exchangor obtain independent professional
advice from the Exchangor's lawyer, accountant or other tax advisor
whether an exchange is appropriate for the Exchangor's situation. Upon
request, National 1031 will provide referrals to professionals qualified
to provide tax, legal and real estate brokerage advice.
Summary of a Delayed
Real Estate Exchange
A delayed exchange transaction
involving National 1031 as the qualified intermediary usually follows
a common pattern:
- The Exchangor negotiates
the sale of the property to be relinquished in the exchange, and enters
into a real estate sales contract with the buyer.
- Prior to the closing of
such sale, Exchangor engages National 1031 to prepare the necessary
exchange documentation and coordinate with the closing or escrow agent
on the preparation of settlement statements and other closing documentation.
- National 1031 prepares
and provides the Exchange Agreement to the Exchangor for review and
clarification of any terms and conditions, and prepares and sends
written closing instructions to the closing or escrow agent.
- At the real estate closing
or close of escrow, National 1031 and Exchangor enter into the Exchange
Agreement, the Exchangor assigns all rights under the sales contract
to National 1031, and the property is sold to the buyer. Legal title
to the property is deeded directly by the Exchangor to the buyer.
- National 1031 receives
and holds the proceeds of the sale subject to its continuing responsibility
under the Exchange Agreement to acquire replacement property for the
Exchangor.
- National 1031 sends the
Exchangor a letter specifying the amount of proceeds held by National
1031, the Exchangor's 45 day "identification" and 180 day "exchange"
deadlines, instructions on identification and a form to identify the
replacement property or properties.
- Within 45 calendar days
after the closing of the sale of Exchangor's property, Exchangor identifies
in writing to National 1031 one or more replacement properties (usually
up to three properties) the Exchangor is interested in acquiring.
- Exchangor negotiates a
real estate purchase contract with the seller of each of the properties
to be acquired as replacement property.
- National 1031 prepares
closing instructions to the closing or escrow agent regarding preparation
of the settlement statements and other closing documentation for each
replacement property. At the closing, Exchangor assigns all rights
under the real estate purchase contract to National 1031, and the
replacement property is purchased using proceeds from the sale of
Exchangor's property and, if necessary, with additional funds provided
by Exchangor and/or financing arranged by Exchangor. Legal title to
the property is deeded directly by the seller to the Exchangor.
For a delayed exchange to
be successful, the purchase of all replacement property to be acquired
as part of a unified exchange must be closed within 180 calendar days
of the date that the sale of the Exchangor's property was closed.
Fees, Interest
and Costs
National 1031 charges a
reasonable fee to set up a deferred or simultaneous exchange based upon
the value of the property or properties being sold, with a minimum of
$300 per relinquished property. An flat fee of $300 is charged for the
acquisition of replacement property in the exchange. National 1031 pays
interest on the total balance of exchange proceeds held during an exchange
at a rate which is tied to the current 90 day Treasury Bill rate
if the amount of exchange proceeds exceeds $100,000 .
Fees for handling special exchange transactions, such as improvement
exchanges and reverse exchanges, are based upon a standard fee plus
a percentage of the value of the property held by National 1031. Ordinary
and necessary expenses for delivery services and wire transfers are
charged by National 1031 to the Exchangor. For more information
please review our Fee Schedule.
Conclusion
National 1031 offers professional
and experienced qualified intermediary services that provide the maximum
assurance to investors and their advisors that exchange transactions
will be completed as planned and with the desired tax results. We invite
your questions regarding our services or fees, and hope that you will
contact us to discuss your particular situation.
NOT TO BE CONSTRUED
TAX OR LEGAL ADVICE. IF TAX OR LEGAL ADVICE IS NEEDED, AN ATTORNEY,
ACCOUNTANT OR OTHER QUALIFIED COUNSEL SHOULD BE CONSULTED.
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