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The Classic Forward Exchange


What You Need to Know - The “Nitty Gritty”

Section 1031 of the Internal Revenue Code creates a “safe harbor” that allows investors to defer the payment of tax on the gain from the sale of property held for productive use in business, trade or investment, provided that the property is exchanged for a “like kind” asset or assets.

The IRS requires that proceeds from the sale of relinquished property be held by a Qualified Intermediary (“QI”) until the replacement property is purchased. The taxpayer must assign to the QI their interest as seller of relinquished property. In connection with this assignment, a “Deferred Exchange Agreement” is executed between the taxpayer and the QI.

Include the exchange cooperation clause as an addendum to contract. Make sure that the Purchase and Sale Agreement for both the sale of your relinquished property and the purchase or your replacement property requires the counterparty to cooperate in the exchange.

Advise the Title Company/Escrow Agent handling your sale that you are going to 1031 your sales proceeds with your QI; and in this connection, your QI will sign the closing/settlement statement for the relinquished property transaction.

  • Note that the Deed conveying title to the relinquished property is direct to Buyer; the QI will not take title to any property or convey any property.
  • Note that you have 45 days after closing on the sale of your property to identify your potential replacement properties and notify your QI of such identification.
  • Note that you have 180 days after closing on the sale of your relinquished property to close on the purchase of one or more of the replacement properties.
  • BUT, the deadline may be sooner if tax filing is done before the 180-day expiration. To avoid this problem, have your tax preparer file a timely extension.
  • Note that at the closing of the acquisition of the replacement property, you will assign the rights in the contract to your QI and your QI will sign the closing/settlement statement as purchaser. However, the deed will be direct to you. Your QI does not acquire title.
  • Any remaining funds not used to close on the replacement property will be returned and may be taxable as boot.
  • To realize full benefits of the deferred 1031 exchange, the value of replacement property must be equal to or greater than the value of the relinquished.
  • Equity in the replacement property must be equal to or greater than the equity in the relinquished property.
  • Debt on the replacement property must be equal to or greater than the debt on the relinquished.
  • All of the net proceeds must be used to acquire the replacement property.
  • No net boot can be received.