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Regional Sales Director
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Cynthia
Pettyjohn
Certified Exchange Specialist®
Vice President
(310) 755-8226
Email Cynthia
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Frequently Asked Questions |
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Don’t Jeopardize Your 1031 Exchange
What might you be guilty of doing that could potentially
disqualify your 1031 exchange transaction? Here are a few
reasons you could be putting your exchange at risk.
Choosing a Qualified Intermediary that is actually a
disqualified person. Someone who is acting as your agent at the
time of the transaction is disqualified from acting as a
Qualified Intermediary. Who is considered an agent? Someone who
has acted as your employee, attorney, accountant, investment
banker or broker, or real estate agent or broker within the
two-year period ending on the date of transfer of the first of
the relinquished properties. These persons are disqualified
because they are presumed to be under the Taxpayer's control
and when the Taxpayer has control of the exchange funds, this is
constructive receipt. Constructive receipt invalidates the 1031
exchange. See here for exceptions to this rule.
If exchange funds are set aside or otherwise made available to
you, it is considered constructive receipt. Additionally, if you
actually receive the exchange funds or if you benefit
economically from the exchange funds you could invalidate your
exchange.
The most common reason an exchange fails, though, is missed
deadlines. The replacement property(ies) must be identified by
midnight of the 45th day. Therefore, it is advisable to begin
searching for the replacement property as soon as possible. In
addition, the replacement property must be received by the
taxpayer within the exchange period which ends within the
earlier of 180 days from the date on which the taxpayer
transfers the first relinquished property, or the due date for
the taxpayer's federal income tax return for the taxable year in
which the transfer of the relinquished property occurs. See here
for exceptions to these deadlines.
Another not-so-commonly known mistake someone could
inadvertently make would be to change the manner of holding
title from the relinquished to the replacement property. There
are a variety of reasons you might want to do this in an
exchange and some changes are allowed, but you must be sure to
talk it over with your tax advisor first. You can read further
details on vesting title in a 1031 exchange, here.
You must also give serious consideration to any relationship you
might have with the seller of the replacement property.
Acquiring replacement property from a related party is
potentially problematic, and the facts of the transaction should
be reviewed by your tax advisor before proceeding. The IRS could
view the acquisition as an abusive shift of bases between
related parties resulting in tax avoidance and disallow the
exchange. Also, direct swaps between related parties are
allowed, but both parties must hold their newly acquired
properties for at least two years from the date of the last
transfer in the exchange. For more information on exchanging
with related parties, click here.
First American Exchange has helped thousands of taxpayers
successfully complete even the most difficult transactions.
While we don’t provide tax or legal advice, we make it our
business to keep you informed of your exchange deadlines and
other potential pitfalls that could put your exchange in danger
of not qualifying.
Attend Our Complimentary 1031 Exchange Webinars
The Basics
of the 1031 Tax-Deferred Exchange
Tuesday, July 27, 2010
1031
Exchanges and the Settlement Agent
Thursday, July 29, 2010
For more information or to register,
go here.
Like-Kind Requirements for 1031 Exchanges Explained
Internal Revenue Code Section 1031 applies only to "property
held for productive use in a trade or business or for
investment". (IRC section 1031(a)(1)). It allows for the
deferral of capital gain tax if such property is exchanged
solely for property of "like-kind". Contrary to what many people
believe, "like-kind" does not mean that an investor must, for
example, exchange land for land, or a duplex for a duplex. In
the context of real estate, like-kind exchanges are valid
between and among several different types of investment
property, including bare land, commercial property, industrial
buildings, retail stores, apartments, duplexes-even leasehold
interests exceeding 30 years and certain oil and gas interests.
Flexibility and Diversification
The
liberal definition of "like-kind' in real property exchanges
means significant advantages for the investor who elects to
perform a 1031 exchange. For example, when raw land is traded
for a small retail center, capital gain taxes can be avoided,
and the investor will also reap the benefits of owning a
property that will generate increased cash flow. Another
advantage in this example...read
on.

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