1031Exchanges

1031 Exchange Experts:

Cambridge Capital Partners has a team of experienced professionals who are specialists in the 1031 TIC exchange. Our expertise is important because of the complex nature of the 1031 exchange process and TIC investments. There are stringent time constraints with significant tax consequences if deadlines are not met. We work with you one-on-one during each step of the exchange process.

First, we provide access to a wide selection of investment grade properties. Then, we carefully research the properties, conducting several layers of due diligence to identify those properties best suited for you. At each step in the process we ensure that all IRS scheduled requirements and deadlines are met. For more information on 1031 Tenant In Common (TIC) Exchange, contact Doug Thaler. He can be reached at 561-665-1477 or email info@cambridgecapital.org

What is a 1031 Exchange?

A 1031 exchange is simply a method by which a real property owner disposes of one property and acquires another without having to pay any capital gains tax on the transaction. In an ordinary sale transaction, the property owner is taxed on any gain realized by the sale of the property. In an exchange, the tax on the exchange is deferred indefinitely.

1031 exchanges are authorized by Section 1031 of the Internal Revenue Code. Careful adherence to the requirements of Section 1031 is important in maintaining the tax-free status of the transaction. The sale of the relinquished property and the subsequent reinvestment in a replacement property can qualify as a trade or exchange by means of an exchange agreement and the services of a qualified intermediary (see 1031 intermediary). An intermediary can guide you through the IRS’s regulations, making a 1031 exchange easy, inexpensive, and safe. You should also consider having your accountant and/or attorney review any real estate transaction.

What is a 1031 Tenancy in common Exchange?

Tenant-in-Common Ownership, also known as TIC ownership, is rapidly becoming the most popular choice among real estate exchangers seeking ideal replacement properties. While it is often difficult to locate a property that has the right purchase price, debt ratio and closing schedule within the 45-day time limit, TIC properties are flexible enough to meet almost any 1031 exchanger’s needs. A TIC interest represents co-ownership between two or more investors and is especially suited to investors involved in the 1031 exchange process because the properties can be identified and closed in a timely manner thanks to pre-arranged financing.

The following factors have increased the popularity of Tenants in Common investments:

  • The investment property marketplace is over 4 trillion dollars.

  • In California, 90% of all investment properties listed and sold over 3 million dollars were involved in a 1031 Tax-Deferred Exchange.

  • Most non-institutional investors, (individuals,) are not familiar with the strict provisions of the IRC 1031.

  • Owner age shift: 170,000 reach the age of 65 daily .

What is a reverse exchange?

A “reverse” exchange is the “flip side” of a deferred (delayed) exchange. In a “reverse” exchange, the Exchanger acquires the like-kind replacement property before disposing of a relinquished property. Until very recently, it was unclear whether reverse exchanges would be given non-recognition treatment by the IRS. However, on September 15, 2000, this question was answered by the IRS in the form of Revenue Procedure 2000-37 (“Rev. Proc. 2000-37”). This Revenue Procedure provides that tax deferral on reverse exchanges will be recognized if the transactions fall within the scope of an announced IRC 1031 “safe harbor.”

What qualifies as an exchange property Like Kind Properties?

In order to qualify for tax deferred exchange treatment under IRS 1031, the relinquished property must be exchanged for replacement property that is of “like-kind”. This term, “like-kind”, refers to the character of the property and not to its grade or quality. It does not matter whether the real property involved is improved or unimproved since that fact only relates to the grade or quality of the property and not to its kind or class. (Treas. Reg. 1.1031(a)-1(b)). 

Essentially, all real property is “like-kind” with all other real property. To qualify, the Exchanger must have held the relinquished property for investment, or for “productive use in their trade or business,” and must intend to do the same with the replacement property.

  • Any property held for the productive use in a trade or business or for investment, such as an apartment building, equipment, raw land or shopping center. 

  • Section 1031 excludes certain property such as stocks, bonds, partnership interests and stock in trade (i.e. inventory).

Why should I transact a 1031 exchange?

A 1031 exchange allows an investor to defer capital gains tax on a sale of property thereby allowing the investor more money to purchase another property. 

  • An investor can diversify by selling one property and acquiring multiple properties or an investor can consolidate by selling multiple hard-to-manage properties and acquire one property.

What must I do to receive tax-deferred treatment for my 1031 exchange?

An investor must (1) acquire replacement property equal to or greater in value than the relinquished property; (2) the equity in the replacement property must be equal to or greater than the equity in the relinquished property; and (3) all net proceeds must be used in acquiring replacement property.

What are the rules for identification of an exchange property?

  • The 45-Day Rule for Identification.

The first timing restriction for a delayed Section 1031 exchange is for the taxpayer to either close on Replacement Property or to identify the potential Replacement Property within 45 days from the date of transfer of the exchanged property. The 45-Day Rule is satisfied if replacement property is received before 45 days has expired. Otherwise, the identification must be by written document (the identification notice) signed by the taxpayer and hand-delivered, mailed, faxed, or otherwise sent to the Intermediary. The identification notice must contain an unambiguous description of the replacement property. This includes, in the case of real property, the legal description, street address or a distinguishable name.

After 45 days, limitations are imposed on the number of potential Replacement Properties which can be received as Replacement Properties. More than one potential replacement property can be identified under one of the following three conditions:

  • The Three-Property Rule – Any three properties regardless of their market values.

  • The 200% Rule – Any number of properties as long as the aggregate fair market value of the replacement properties does not exceed 200% of the aggregate FMV of all of the exchanged properties as of the initial transfer date.

  • The 95% Rule – Any number of replacement properties if the fair market value of the properties actually received by the end of the exchange period is at least 95% of the aggregate FMV of all the potential replacement properties identified.

Although the Regulations only require written notification within 45 days, it is recommended practice for a solid contract to be in place by the end of the 45-day period. Otherwise, a taxpayer may find himself unable to close on any of the properties which are identified under the 45-day letter. 

After 45 days have expired, it is not possible to close on any other property which was not identified in the 45-day letter. Failure to submit the 45-Day Letter causes the Exchange Agreement to terminate and the Intermediary will disburse all unused funds in his possession to the taxpayer.

The 180-Day Rule for Receipt of Replacement Property. The replacement property must be received and Exchange completed no later than the earlier of 180 days after the transfer of the exchanged property or the due date (with extensions) of the income tax return for the tax year in which the exchanged property was transferred. The replacement property received must be substantially the same as the property which was identified under the 45-day rule described above. There is no provision for extension of the 180 days for any circumstance or hardship.

As noted above, the 180-Day Rule is shortened to the due date of a tax return if the tax return is not put on extension. For instance, if an Exchange commences late in the tax year, the 180 days can be later than the April 15 filing date of the return. If the Exchange is not complete by the time for filing the return, the return must be put on extension. Failure to put the return on extension can cause the replacement period for the Exchange to end on the due date of the return. This can be a trap for the unwary.

CHOOSE A QUALIFIED INTERMEDIARY

  1. Choose an qualified exchange accommodator (QEAA) The QEAA should send you all of the documentation necessary to identify the exchange property. You may contact 1031Realestate.net at http://www.1031realestate.net. 

  2. When you put the property that you are selling into contract, we will forward you an introductory package that will walk you step by step through the exchange process.

  3. Your initial package will include a fact sheet, identification letter, fee schedule and contract language. You may download a sample of this package and other relevant information from our website at http://www.1031realestate.net.

If I have already signed our sale contract, is it too late to effectuate a 1031 exchange?

No, as long as you have not closed on the property you are selling and received the sale proceeds, a 1031 exchange can still be completed. However, once the closing occurs, it is too late to take advantage of Section 1031.

IRS Revenue Procedures

  1. Rev. Proc. 2000-37  Like Kind Exchanges Replacement Properties.
    This revenue procedure provides a safe harbor under which the Internal Revenue will not challenge (a) the qualification of property as either replacement propertyï,relinquished property(as defined in 1.1031(k)-1 of the Income Tax Regulations) for purposes of 1031 of the Internal Revenue Code.

    Rev. Proc. 2003-39 Like Kind Exchanges Safe harbor rules are provided under section 1031 of the Code, which allows for deferral of gain realized on a like-kind exchange of property, with respect…

    …use in trade or business or for investment; 1.1031: Treatment of deferred exchanges. Rev. Proc. 2003�39 SECTION 1. PURPOSE This revenue procedure…
    …procedure provides safe harbors with respect to programs involving ongoing exchanges of tangible personal property using a single intermediary.

    Revenue Procedure 2002-22 – Undivided fractional interests in real estate. 
    This procedure specifies the conditions under which the Service will consider a request for a ruling that an undivided fractional interest in rental real property