FAQs
- What is like-kind property?
- Why do I need a qualified intermediary?
- Will I earn interest on the funds held by ITEC as the intermediary?
- What about the safety of my funds?
- How much will it cost to do an exchange?
- Do I need an attorney?
- Can I purchase the replacement property before I sell the relinquished property?
- Can I purchase a lot and build on it as my replacement property?
- Can I exchange property with a related party?
- Do you have any other information?
- How do I get started?
1. What is like-kind property?
For exchanges of real property, the definition is very broad. As long as the property is held for investment purposes or use in a trade or business, different types of property may be swapped. For example, an apartment complex may be exchanged for an office building; or raw land may be exchanged for a rental house.
2. Why do I need a qualified intermediary?
A qualified intermediary is one of the safe harbors afforded exchangers by the tax code when structuring 1031 exchanges. ITEC, as a qualified intermediary, will provide exchange documents, serve as the exchanger's exchange partner, and hold the exchange funds from the sale of the relinquished property to purchase replacement property. The tax code prohibits a related party or an attorney, CPA, or other agent of the taxpayer who has represented him in any matter during the last two years to serve as qualified intermediary. Most exchangers find that the most efficient and economical way to structure their exchange is through a professional, experienced qualified intermediary who handles exchanges on a daily basis.
3. Will I earn interest on the funds held by ITEC as the intermediary?
Yes. Your exchange agreement will specify the rate of interest you will earn. The interest becomes a part of the exchange funds and is subject to the same rules regarding constructive receipt as the exchange funds themselves, so it is unavailable to the taxpayer until the end of the exchange. Any interest earned is taxable as normal interest income.
4. What about the safety of my funds?ITEC's accounts are independently audited by an outside accounting firm. ITEC practices sound accounting principles, and all disbursements from your account must be approved by you or your attorney.
5. How much will it cost to do an exchange?
An exchange is a paper-intensive transaction that requires legal and tax advice beyond the scope of a normal closing; so, there are additional fees beyond normal closing costs. Investors Title Exchange Corporation charges a flat-rate fee for its services as qualified intermediary, regardless of the number of properties or the value of the property in an exchange. Please contact ITEC for current rates. The taxpayer's attorney also charges for his services in coordinating the exchange and rendering legal advice. However, these expenses are considered exchange expenses and can usually be deducted from the sales proceeds. The additional transaction costs should be measured against the potential tax savings.
6. Do I need an attorney?
1031 exchanges are technical and complex transactions. To stay within the safe harbors of the tax code and manage the process and parties involved in the transaction, exchangers should employ competent and experienced counsel. ITEC works with exchanger's counsel to support and coordinate the process but does not provide tax advice to individual taxpayers.
7. Can I purchase the replacement property before I sell the relinquished property?
In September 2000, the IRS in Revenue Procedure 2000-37 provided a safe harbor for reverse exchanges. Under the provisions of a qualified exchange accommodation agreement that meets the safe harbor requirements, the taxpayer's replacement property is acquired by an Exchange Accommodation Titleholder (EAT) who holds the property until the taxpayer sells the relinquished property. The relinquished property is then exchanged for the replacement property via a Qualified Intermediary. Reverse exchange rules mirror deferred exchange rules, requiring the taxpayer to identify his relinquished property within 45 days of the EAT's acquisition of the replacement property, and close on the sale of the relinquished property within 180 days. Investors Title Accommodation Corporation (ITAC), in conjunction with ITEC, provides reverse exchange services. To avoid the additional complexity and expense of a reverse exchange, taxpayers should first try to delay the purchase of replacement property until after the relinquished property sells. But where this is impossible, a reverse exchange is a valuable tool. Taxpayers should seek experienced counsel for advice in structuring a reverse exchange.
8. Can I purchase a lot and build on it as my replacement property?
Called a "build-to-suit" exchange, this can be even more complex than a reverse exchange. The taxpayer cannot generally take title to the Replacement Property land until after the construction is complete, so the building must generally be completed within the 180-day exchange period. Issues such as who will hold title to the land during construction, finance the improvements and manage and supervise the construction must be addressed. This is another example of a complicated exchange requiring experienced counsel. The transaction costs are typically significantly greater than an ordinary exchange. ITEC, working closely with the taxpayer's counsel, can sometimes assist with facilitating a build-to-suit exchange.
9. Can I exchange property with a related party?
The tax code permits exchanges with related parties; however, much more stringent rules apply. In a direct exchange or swap with a related party, neither party can sell the property they acquired in the exchange for two years. In a deferred exchange using an intermediary, the rules are less clear. It is generally held that if a taxpayer sells the Relinquished Property to a related party, the related party cannot sell the property for two years without triggering a taxable event. It is currently questionable whether a taxpayer can purchase property from a related party at all unless the related party is also doing an exchange on the property he is selling. The IRS recently ruled against a taxpayer who purchased Replacement Property from his mother in a deferred exchange using an intermediary. If you are contemplating an exchange that involves a related party, you should seek counsel to insure that you are complying with the related party rules.
10. Do you have any other information?
Click on our
Exchange Manual for more information on eligible properties, deadlines, constructive receipt rules, identification rules, documentation, tax filing requirements and other information.
11. How do I get started?
Click on
To Get Going which will guide you through the initial steps.
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