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1031 Qualified Intermediary Services for real estate investors
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Standard (Forward) Exchange
- Property being sold and property being acquired must both be “held for investment purposes” (i.e. for appreciation in value; for rent; for business use). Also known as “like-kind” property. Primary Residences cannot be exchanged under 1031.
- The taxpayer/exchanger MUST use the services of a Qualified Intermediary (i.e. “QI”) pursuant to an Exchange Agreement.
- The taxpayer/exchanger cannot actually or constructively receive proceeds from the sale or the transaction will be disqualified.
- The taxpayer must enter into an Exchange Agreement (“EA”) on or before the date of transfer of the Relinquished Property (“RQ”).
- The taxpayer must identify – in writing – potential properties that will be the replacement property in the exchange. Treasury Regulations require that this written identification must be made in a certain manner; and required that it be done within 45 days following close of escrow for the sale of the Relinquished Property; further, the rules limit the number of properties the taxpayer may identify as potential replacement properties.
- The taxpayer may not have access to any of the exchange proceeds during the exchange period.
- The taxpayer must complete the acquisition of one or more of the “identified properties” within 180 days from the sale of the RQ property or the due date of the tax return for the year in which the RQ sold. This is the “Exchange Period”.
Day 0: Closing/sale of Relinquished Property
Day 45: Deadline to identify potential Replacement Properties
Day 180: Deadline to close on Replacement Property(ies)
The Exchangor must identify potential replacement properties within the first 45 days of the exchange period. This is done in writing with a form we supply, and the identification must comply with one of the following three “rules”:
- Three Property Rule: Can identify up to three property of any value.
- 200% Rule: Can identify any number of properties as long as the combined FMV does not exceed 200% of the value of the relinquished property.
- 95% Rule: Can identify any number of properties in excess of 200% of the value of the relinquished property so long as at least 95% of the combined FMV of the identified properties are acquired.
- Enter into a sale contract to sell the relinquished property; include language that the seller is performing a 1031 exchange, and purchaser agrees to cooperate with the exchange;
- Notify title company before sale of relinquished property that seller wishes to do a 1031 exchange;
- Contact Title Exchange Services (“TES”) to engage our services as a Qualified Intermediary (“QI”); include a copy of the sale contract and contact information for the title company;
- TES will prepare the Exchange Agreement and other relevant documentation;
- The sale contract is assigned to TES; TES becomes the seller for the purposes of closing;
- TES executes the closing statement as Seller (seller executes all other documents, including the warranty deed and affidavits);
- TES receives the sales proceeds and deposits into its escrow account;
- TES works directly with Exchangor to document identification of replacement properties;
- Exchangor enters into contract to purchase replacement property, and includes language that the purchaser is completing a 1031 exchange, and seller agrees to cooperate with the exchange;
- Notify the title company
- Contract will be assigned to TES, which becomes the purchaser for the purpose of closing;
- TES executes the closing statement as Purchaser (purchaser executes all other documents);
- TES provides the necessary funds for the acquisition directly to title company.
Reverse Exchange
- Property being sold and property being acquired must both be “held for investment purposes” (i.e. for appreciation in value; for rent; for business use). Also known as “like-kind” property. Primary Residences cannot be exchanged under 1031.
- The taxpayer/exchanger MUST use the services of a Qualified Intermediary (i.e. “QI”) pursuant to an Exchange Agreement.
- The taxpayer/exchanger MUST use the services of an Exchange Accommodation Titleholder (“EAT”) under a Qualified Exchange Accommodation Arrangement (“QEAA”).
- The Replacement Property must be acquired by the EAT. The QI will create the EAT in the form of an LLC in which QI is sole member. The taxpayer may NOT hold title to the property.
- The Exchangor advances funds and/or secures debt to acquire the property on behalf of the EAT. The EAT will not guarantee any of the debt.
- The taxpayer must enter into an Exchange Agreement (“EA”) no later than five business days after the transfer of the Replacement Property to the EAT.
- The taxpayer must identify – in writing – potential properties that will be the Relinquished Property(ies) in the exchange. Treasury Regulations require that this written identification must be made in a certain manner; and required that it be done within 45 days following close of the acquisition of the Replacement Property; further, the rules limit the number of properties the taxpayer may identify as potential relinquished properties.
- The taxpayer must complete the sale of one or more of the “identified properties” within 180 days from the acquisition of the Replacement Property or the due date of the tax return for the year in which the Replacement Property sold. This is the “Exchange Period”.
Day 0: Closing/sale of Replacement Property
Day 45: Deadline to identify potential Relinquished Properties
Day 180: Deadline to close on Relinquished Property(ies)
The Exchangor must identify potential relinquished properties within the first 45 days of the exchange period. This is done in writing with a form we supply, and the identification must comply with one of the following three “rules”:
- Three Property Rule: Can identify up to three properties of any value.
- 200% Rule: Can identify any number of properties as long as the combined
FMV does not exceed 200% of the value of the replacement property. - 95% Exception: Can identify any number of properties if 95% of the value of the identified properties are sold.
- Enter into a sale contract to sell the Replacement Property, and include language that the purchaser is completing a 1031 exchange, and seller agrees to cooperate with the exchange;
- Notify the title company before the sale that you are completing a Reverse 1031 Exchange
- Notify Title Exchange Services (“TES”) that you wish to engage their services as Qualified Intermediary (“QI”); send a copy of the sale contract and contact information for the title company;
- Establish funding for the acquisition of the Replacement Property;
- TES will prepare the Exchange Agreement, the Exchange Accommodation Titleholder LLC and other relevant documentation;
- The sale contract is assigned to TES; TES becomes the purchaser for the purposes of closing;
- Exchangor secures casualty & liability insurance for the Replacement Property, with the EAT identified as the Insured;
- Exchangor obtains a Phase 1 Environmental report and provide to TES for review (prior to closing) and acceptance;
- TES executes the closing statement as Purchaser (Exchangor executes all other documents, including any necessary affidavits);
- The EAT is identified as the grantee on the warranty/conveyance deed and receives title to the property;
- The TES enters into a Lease and Property Management Agreement with the Exchangor, allowing the Exchangor to manage and control the property during the exchange period;
- TES works directly with Exchangor to document identification of potential relinquished properties;
- Exchangor enters into contract to sell the Relinquished Property; include language that the seller is performing a 1031 exchange, and purchaser agrees to cooperate with the exchange;
- Contract will be assigned to the TES, which becomes the seller for the purpose of closing;
- TES executes the closing statement as Seller (Exchangor executes all other documents, including the warranty/conveyance deed);
- The proceeds of from the sale of the Relinquished Property are transferred to the TES;
- Upon completion of the sale of all of the Relinquished Properties, the EAT will convey the Replacement Properties to the Exchangor, and the TES will transfer the proceeds in the exchange account to Exchangor.
- Funding challenges – the Exchangor must fully fund the purchase of the Replacement Property. If a lender will be used, the lender must be familiar with reverse exchanges as certain loan documentation will require execution by the EAT
- Complexity & expense – the reverse exchange process is far more complex and consequently far more expensive than a standard forward exchange. Investors should look to structure purchase agreements for the replacement property to allow for extensions in order to try to close the relinquished property first – and therefore save money and headaches!
- Other reverse exchange structures – instead of buying the Replacement Property and “parking” that with the QI, Exchangors have the option to “park” the Relinquished Property instead of the Replacement Property. This works when the Exchangor knows definitively which property will be sold as part of the exchange and allows the Replacement Property to be taken directly in the name of the Exchangor. This structure is far less common, but if you are interested in pursuing this route, contact us for more information.
Improvement Exchange
- Property being sold and property being acquired must both be “held for investment purposes” (i.e. for appreciation in value; for rent; for business use). Also known as “like-kind” property. Primary Residences cannot be exchanged under 1031.
- The taxpayer/exchanger MUST use the services of a Qualified Intermediary (i.e. “QI”) pursuant to an Exchange Agreement.
- The taxpayer/exchanger MUST use the services of a Qualified Intermediary (i.e. “QI”); OR a Qualified Trust; OR a Qualified Escrow Account to handle the transaction.
- The taxpayer/exchanger cannot actually or constructively receive proceeds from the sale or the transaction will be disqualified.
- The taxpayer must enter into an Exchange Agreement (“EA”) on or before the date of transfer of the Relinquished Property (“RQ”).
- The taxpayer must identify – in writing – potential properties that will be the replacement property in the exchange. Treasury Regulations require that this written identification must be made in a certain manner; and required that it be done within 45 days following close of escrow for the sale of the Relinquished Property; further, the rules limit the number of properties the taxpayer may identify as potential replacement properties.
- The taxpayer must complete the acquisition of one or more of the “identified properties” within 180 days from the sale of the RQ property or the due date of the tax return for the year in which the RQ sold. This is the “Exchange Period”.
- The taxpayer may not have access to any of the exchange proceeds during the exchange period.
- The taxpayer/exchanger MUST use the services of an Exchange Accommodation Titleholder (“EAT”) under a Qualified Exchange Accommodation Arrangement (“QEAA”).
- The Replacement Property must be acquired by the EAT. The QI will create the EAT in the form of an LLC in which QI is sole member. The taxpayer may NOT hold title to the property.
Day 0: Closing/sale of Relinquished Property
Day 45: Deadline to identify potential Replacement Properties
Day 180: Deadline to close on and complete improvements to Replacement Property(ies)
The Exchangor must identify potential replacement properties within the first 45 days of the exchange period. This is done in writing with a form we supply, and the identification must comply with one of the following three “rules”:
- Three Property Rule: Can identify up to three properties of any value.
- 200% Rule: Can identify any number of properties as long as the combined FMV does not exceed 200% of the value of the relinquished property.
- 95% Rule: Can identify any number of properties in excess of 200% of the value of the relinquished property so long as at least 95% of the combined FMV of the identified properties are acquired.
- Enter into a sale contract to sell the relinquished property; include language that the seller is performing a 1031 exchange, and purchaser agrees to cooperate with the exchange;
- Notify title company before sale of relinquished property that seller wishes to do a 1031 exchange;
- Contact Title Exchange Services (“TES”) to engage our services as a Qualified Intermediary (“QI”); include a copy of the sale contract and contact information for the title company;
- TES will prepare the Exchange Agreement and other relevant documentation;
- The sale contract is assigned to TES; TES becomes the seller for the purposes of closing;
- TES executes the closing statement as Seller (seller executes all other documents, including the warranty deed and affidavits);
- TES receives the sales proceeds and deposits into its escrow account;
- TES works directly with Exchangor to document identification of replacement properties;
- Exchangor enters into contract to purchase replacement property, and includes language that the purchaser is completing a 1031 exchange, and seller agrees to cooperate with the exchange;
- Notify the title company that the purchaser is completing a 1031 improvement exchange and TES is the QI for that purpose;
- Send TES copies of the sale contract, the construction budget and construction contract, and contact information for the title company and lender (if any);
- TES will prepare the QEAA and other exchange documentation to reflect the improvement exchange;
- TES will create documentation for the Exchange Accommodation Titleholder (“EAT”), which will hold title throughout the construction period and in which TES is the sole member;
- Contract and QEAA will be assigned to the EAT;
- Exchangor to obtain a Phase 1 Environmental report and provide to TES for review (prior to closing) and acceptance;
- The EAT executes the closing statement, the Deed of Trust / Mortgage (if applicable), the construction escrow disbursing agreement (if applicable) as Purchaser, and Exchangor executes all other documents;
- TES provides the necessary funds for the acquisition directly to title company;
- Each payment application shall be approved by the Exchangor and forwarded to EAT for authorization, and funds will be advanced for payment of construction invoices;
- At conclusion of the construction, the Exchangor will send a written request to EAT to transfer the property to Exchangor. The transfer will be in the form of a deed OR in transfer of membership interest in the EAT’s LLC.