1031 Exchanges

1031 Exchanges: We get a lot of questions about 1031 tax deferred exchanges. Many people have a basic idea of what they are and how they work, but there are still many questions raised. In its simplest form, an investment property being sold can be ‘exchanged’ for another investment property that is being purchased. If the ‘exchanger’ does not receive the money from the sale of their property and uses that money to purchase another property, it is viewed by the IRS as a ‘tax deferred exchange’ and the exchanger does not have to pay capital gain taxes on any gain realized on the sale of the first property. A seller has 180 days to complete this process, 45 days from the time he sells the first property to identify a property to be purchased (exchanged for) and then another 135 days to purchase the new property.

Exchanges are primarily for investment properties, as you cannot do an exchange for a personal residence or a second home (unless the second home is rented to the public part of the time). Beyond that, there are many different types of property that can be used in an exchange and the ‘types’ do not have to be the same. Income producing property can be exchanged for raw land. Certain types of land rights (water rights, mineral rights) can be exchanged for real property. Exchanges can be ‘reverse’ exchanges where the property to be exchanged for is purchased first and then the exchanger’s property is sold. Exchanges can include construction.

If you are contemplating an exchange, it is advisable to obtain the services of a Qualified Intermediary (QI). They are the experts in this complicated field and can answer specific questions about alternatives given your particular situation. Another recommendation is to use a Qualified Intermediary who is associated with a publicly traded company. There have been instances where QIs have filed bankruptcy and been unable to complete exchanges for their customers. Not only did the customers lose all, or a portion of their exchange funds, but they then had to pay taxes on any gain realized from their sale. Just last year, a fairly large company encountered such problems and took 21 separate 1031 companies into bankruptcy. The companies that failed last year affected a number of local individuals. There was an article in the Express News, Sunday, March 16th as to the dilemma facing the investors whose money was ‘borrowed’ by Ed Oakun, owner of the companies, which included National Exchange Services in San Antonio. In response to this fairly large failure, which affected hundreds of investors, the IRS recently issued this warning concerning this unregulated industry:

"Be careful in your selection of a Qualified Intermediary as there have been recent incidents of intermediaries declaring bankruptcy or otherwise being unable to meet their contractual obligations to the taxpayer. These situations have resulted in taxpayers not meeting the strict timelines set for a deferred or reverse exchange, thereby disqualifying the transaction from Section 1031 deferral of gain. The gain may be taxable in the current year while any losses the taxpayer suffered would be considered under separate code sections."

In view of this, it is strongly recommended that QIs be affiliated with publicly traded companies that are subject to the auditing and accounting standards of such companies. All of our major underwriters provide 1031 Exchange services, as do many of the major bankss. If you are contemplating a transaction that might include a 1031 tax deferred exchange, contact a QI before you begin to be sure you understand the process and time requirements.
Mike 

Welcome to Kendall County Abstract Company's new home on the Web.  We are extremely pleased to take this next step, moving from basically an informational website to a more functional interactive website.  We hope you find the tools and resources to help you determine the consequences of your transaction useful.  We get numerous calls about premium rates and tax rates.  With the Premium Calculator, Mortgage Calculator, Tax Rates and Estimated Closing Costs available at a mouse click, you can now get a ballpark estimate of what it will require financially to complete a transaction you may be considering.  Keep in mind the closing costs are estimates, but they are ballpark figures for most standard transactions and will at least give you an idea of where you will be cost-wise.  If you are a real estsate professional located in the Boerne area, I will be coming by your office in the next few weeks to demonstrate the functionality of the site.  If you are not located in the Boerne area or an individual, obviously, I can't get out to see each and every one of you, but if you have questions about using any of the resources, either email or call any staff member and we will be glad to assist you.  I will be using this 'Updates' location on the site to keep the site users apprised of issues that I believe will be of interest or beneficial to you.  I will be updating this area on a weekly basis, or immediately if something arises that I believe you need to know about sooner.  Each time you log onto the site, be sure to check the 'Updates' section.  If any of you have issues you would like for me to discuss in this section, just contact me with your issue or question and I will address it at the next update.
Mike Lang