If the replacement property isn’t closed on or before the “45 Day Rule”, the notification of the Replacement property must be made by written documentation (i.e. the identification notice) and signed by the Taxpayer/Seller and hand-delivered, mailed, faxed or electronic notification must be sent to the Qualified Intermediary. The identification notice must contain an unambiguous description of the Replacement Property. This should include in the case of real property, the legal description, street address, tax locator number or a distinguishable name. . . .Read more
One of the guidelines set forth by the IRS in the 1031 Code is the identification of a potential replacement property. The “45 Day Rule” is standard compliance language when dealing with a 1031 Exchange. The Replacement Property must either be Closed or Identified within 45 days from the date of transfer of the exchanged property. For the prudent Taxpayer/Seller engaging upon a 1031 Exchange adventure, as soon as the Relinquished Property becomes “Under Contract” one may want to proceed forward in diligently looking the “Replacement” property. This 45 Day Rule seems to create an air of excitement and stress coming down to the last days and there never seems to be enough time. But remember, the timing begins upon the Relinquished property closing. This is why the suggestion is always to begin your replacement property search prior to the actual Closing of the property. By doing this, you have your standard 45 days as well as the timing it takes for the relinquished property purchaser to accomplish their due diligence. . . .Read more
IRC 1031 states that property: “held for productive use in a trade or business or for investment” must be exchanged for “like-kind” property. A question frequently asked is “What is Like Kind?” “Like Kind” is extremely broad in the definition. Provided the property is used as an Investment and/or an Income producing Investment, the definition can vary from Farm Land to Apartments; from Commercial Retail to Industrial; from Single Family income producing properties to one or more speculative investment property. These investments can range from Retail properties with pass through income to Industrial Properties with no pass through. . . .Read more
1) This allows the Taxpayer to move from a high equity property in return for a higher leveraged property. . . .Read more
Defines as: Exchange of property held for productive use in a trade or business or for an Investment. . . .Read more
BOOT: “Non-Like-Kind” property. Taxable to the extent there is capital gain. . . .Read more
EXCHANGE PERIOD: The period of time in which the Replacement property must be received by the Exchanger. This ends on the earlier of one hundred eighty (180) calendar days after the Relinquished property Closes or the due date for the Exchangers Tax Return (if the 180th day falls after the due date of the Exchanger’s tax return, an extension may be filed to receive the full 180 day exchange period). . . .Read more
EXCHANGE AGREEMENT: The written Agreement defining the transfer of the Relinquished Property, the subsequent receipt of the Replacement Property, and the restrictions on the exchange proceeds during the Exchange Period. This MUST BE set up prior to the Exchange and is a requirement to comply with Section 1031 of the IRS Codes. . . .Read more
A 1031 Property Exchange is an important RE investment strategy that allows the “taxpayer” to defer 100% of their capital gains on both their Federal and State taxes. What’s even more grand about this is that it provides a strategy for passing along to one's heirs the asset(s) at a stepped up “Basis”. Meaning simply, if the “Value” of the asset was $1,000,000 five (5) years ago and the “Taxpayer” strategy is to pass the asset along to their heir (if the asset is now worth $1,200,000.00), the asset moves to the heir at a higher basis than what the "Taxpayer" once had in the asset. This means that the 1031 Exchange process can continue at the new “Basis” OR the heir can sell the property at the basis they’ve inherited it and with the “stepped up” basis, perhaps owe less (if any) taxes on the sale.
Of course, everyone's tax situation is different and this strategy may not apply to your specific situation. Regardless, a 1031 Exchange opportunity is an important strategy to consider when looking ahead to the relinquishment of your commercial real estate assets. . . .