Exchange Process
Qualified Intermediary:

Before you put the property under contract, find someone to act as a qualified intermediary, also called a facilitator or accommodator. This person or entity is a neutral party that takes possession of the proceeds from the sale of your property, uses the funds to purchase the new property, then transfers title of the property to you.

A qualified intermediary is a person who enters into a written exchange agreement with you to acquire and transfer the property you give up and to acquire the replacement property and transfer it to you. This agreement must expressly limit your rights to receive, pledge, borrow, or otherwise obtain the benefits of money or other property held by the qualified intermediary. -IRS

Every exchange requires an independent and non related third party to act as the facilitator of the exchange. The code is very clear on who can and cannot act as a Qualified Intermediary. Any related party (brother, sister, spouse, ancestor or lineal descendant) or company or individual that has acted as your accountant, attorney, real estate agent/broker or investment advisor within two years preceding the exchange is not allowed to be the Qualified Intermediary for the exchange.

The exchangor(s) (sellers of the property) will assign to their Qualified Intermediary their interest in the property and sales contract when selling and the Qualified Intermediary will accept the proceeds of the sale to be put into a fully insured separate escrow account on behalf of the exchangor(s). When the exchangor(s) purchase a replacement property, the exchangor(s) now buyers will assign to their Qualified Intermediary their interest in the purchase contract and the Qualified Intermediary will give the sellers the funds in escrow to complete the purchase. The sellers will still deed to the exchangor(s) directly the property which was purchased. It is important to know that no duplicate deeding takes place.

When Waterford 1031 Exchange Services, LLC acts as your Qualified Intermediary we:
  • Confer with you and your support staff so that 1031 rules and regulations are thoroughly understood.
  • Prepare the necessary documentation and oversees each closing to assist in maintaining proper 1031 procedures.
  • Provide guidelines, knowledge and vigilantly observes the critical time limits throughout the entire exchange process.
Constructive receipt of funds:
No sellers or exchangor(s). are allowed to control or exercise any undue influence of the proceeds of the property that was sold (relinquished) nor have physical receipt of the funds. The funds from the sale of the property are deposited into a separate fully insured escrow account at a Federally Insured Institution.

Identification of replacement property:
After the property is sold, the exchangor(s) must locate a suitable piece of property or multiple properties as the replacement. An exchangor is only given 45 days, starting on the day the property is sold to complete this process. There are certain rules that have to be adhered to regarding identification. If three or less properties are identified, then there are no concerns, if an exchangor identified more than three, then the combined total estimated sales prices of all the properties the must not exceed more than 200% of the selling price of the property which was sold.

Qualifying property and like kind property:
The property which is being exchanged must have been qualifying property, that is, property used for productive use in a trade or business/rental or for investment (include raw land), and the exchangor(s) must acquire qualified replacement property which they intend to hold for productive use in a trade or business or for investment. Qualifying property for the sale and replacement do not have to be the same kind physically just that they are used in a trade or business/rental or for investment.

Example: An apartment building used as rentals can be exchanged for a strip mall or even raw land. Raw land may be exchanged for raw land or even a shopping center. Both qualify because they are either used in a business or trade or for investment. Thus any real property other than the exchangor(s) personal use property (property held as the taxpayers personal residence or vacation home) or dealer property (property intended for resale) will qualify.

Complete the purchase:
An exchangor has 180 days starting the day that the property was sold to complete the purchase or multiple purchases of their replacement property.

Spend as much as the net sales price:
In order to make the entire exchange tax free, an exchangor must purchase a replacement property in an amount equal to or greater then the net sales price of the property which was sold "relinquished property". The net sale price of the relinquished property is the contracted price less any selling expenses including legal fees, transfer taxes, Qualified Intermediary fees and broker fees but excluding the principal balance of any outstanding mortgages and any accumulated interest on them, and any adjustments made for taxes, insurance, rent or security deposits etc. Note that the net sale price is independent of the amount of the mortgage. It is not sufficient to only replace the exchangor's profit or equity in the relinquished property. If an exchangor does not spend the entire amount, then that difference may become taxable as what is called "boot". The Exchangor(s) will then be liable for taxes (Sate if applicable and Federal) to the extent of the fair market value of the boot received, or the realized gain which ever is smaller.

Same mortgage amount:
It is not enough to only spend the entire amount of net sales proceeds for the replacement property, but the exchangor(s) also have to acquire a mortgage on the replacement property in an amount equal or greater than the one on the relinquished property. If an exchangor acquires a mortgage in an amount less than the property relinquished, the exchangor is said to have received "boot" and it may become taxable to the extent of the fair market value of the boot received, or the realized gain which ever is smaller.

Same title of ownership:
The title in which the property was held before the exchange took place will be the manner in which it must be held for the replacement. Any changes to the title before the exchange took place is allowed and this can give you an opportunity in advance.

Filing of tax return:
No tax return should be filed by an exchangor until the exchange has been completed. Every exchange requires an IRS form 8824 that has to be attached to the exchangor(s) tax return. If an exchangor does file their tax return and the exchange has not been completed ( all replacement property has been acquired) then the exchange will be disallowed. An exchangor must put themselves on extension and file the return when the exchange has been completed.

Example for above: Lets say an exchange was started late in the year on December 20. The exchangor has 180 days to complete the exchange. Adding 179 days to December 20 (no leap year) gives the exchangor until June 17 to complete the exchange. Assuming that the exchangor was an individual, June 17 is past their filing date of April 15th. In this case they must put themselves on extension.

1031 Exchange Information - 1031 Replacement Property
Investment Property & Business Property only. To be eligible to be part of a 1031 Exchange both the relinquished and replacement property must be U.S. real property (including equipment.), which is held for investment purposes or used in the taxpayer’s trade or business. For example, any real estate in the U.S., whether improved or unimproved, that is kept for business, investment or income producing purposes, including the taxpayer’s office facilities, shop, etc. as well as the accompanying equipment. (Equipment not to exceed 15% of total value).


ImageLike Kind Properties
Exchanged properties must be like kind. For a real estate exchange this means real-property for real-property, but not necessarily land for land or a rental house for another rental house. Take a look at the IRS rules for specific information about what types of properties qualify as like kind.

You can exchange a single property for multiple properties, or purchase one property from the proceeds of several. Proceeds not used to purchase new investment property are taxed as a cash sale.

In a like-kind exchange, both the property you give up and the property you receive must be held by you for investment or for productive use in your trade or business. –IRS

DELAYED EXCHANGE TIME LIMITS
The “date of transfer” will be the date of recording or transfer of the benefits of ownership, whichever occurs first. If executing a multi-property exchange, the time limits begin to run on the date the Exchanger transfers the first relinquished property to the buyer.
  • The Exchanger must acquire all the replacement property (ies) within 180 days, or the date the Exchanger must file the tax return (including extensions) for the year of the transfer.
  • The Exchanger must identify the potential replacement property (ies) within the first 45 days of the 180 day Exchange Period.
These time limits are in granite. The only exception ever was after 9/11. No one asked. The Treasury acting on its own granted an extension period reflective of the inability to conduct normal everyday business.

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Just a reminder: The 45 day identification period starts the day after closing of the relinquished property. Closing is day zero and the following day is day one. The 45 days are included in the 180 day timeline. You DO NOT have 45 days plus 180. The 45-day and 180-day deadlines may not be extended, even if they fall on a weekend or holiday.
 

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