Actual Title & Abstracting, L.L.C.

• Title Insurance
• About Your Closing
• Louisiana Homestead Exemption
• 1031 Tax Deferred Exchanges

1031 Tax Deferred Exchanges

PURPOSE: Defer payment of capital gains taxes.

PROPERTY THAT CAN BE EXCHANGED: Real property or personal property such as aircraft, vessels, equipment, or art.

LIKE KIND REQUIREMENT: Properties must be like kind. For example, real estate for real estate or aircraft for aircraft.

INVESTMENT REQUIREMENT: Properties must be held for investment or in connection with a trade or business but do not have to be similar use (exchange raw land for an apartment building).

EXCHANGE TRANSACTION: This has two parts. The “transfer” of relinquished property and “acquisition” of replacement property.

SAME TAXPAYER REQUIREMENT: The taxpayer must acquire title to the replacement property in the same manner as title was held to the relinquished property. The only potential exception is a single member limited liability company of which the taxpayer is the sole member.

DEADLINES: Two deadlines, both of which begin on the date of transfer of the first relinquished property. Replacement property(ies) must be identified within 45 days. The exchange must be completed by the earlier of 1) 180 days from the date of the first relinquished property closing; and 2) the due date of the taxpayer’s federal income tax return, together with all extensions.

IDENTIFICATION RULES: Two identification rules from which to choose - 1) 3 Property Rule- up to three (3) properties can be identified without regard to their fair market value. 2) 200% Rule- Any number of properties as long as their combined fair market value does not exceed 200% of the fair market value of all relinquished property.

FULLY DEFERRED EXCHANGE: Must meet three (3) criteria to have a fully deferred exchange. 1) The replacement property(ies) must be equal to or greater in value than the value of the relinquished property; 2) the amount of equity in the replacement property(ies) must be equal to or greater than the amount of equity in the relinquished property; and 3) the taxpayer cannot receive any non-like kind property such as cash from the sale fo the relinquished property or taking back a Promissory Note from the buyer of the relinquished property. To the extent all three (3) criteria are not met, tax consequences are created.

Actual Title will work with First American Exchange Company to facilitate your 1031 exchange. Below Is a Step-by-step Delayed Exchange Procedure through First American Exchange Company.

1. Taxpayer (also called "Exchangor") enters into an agreement to sell business or investment property.
2. Taxpayer retains the services of an independent tax advisor.
3. To avoid paying costly capital gains taxes, Taxpayer requests that First American Exchange Company act as Qualified Intermediary in the property sale. Taxpayer then completes the Relinquished Property Information Form and returns it to First American Exchange Company along with a copy of the purchase and sale agreement.
4. Once all contingencies under the purchase and sale agreement are satisfied, and at or before the closing of the transfer of the relinquished property, Taxpayer enters into an Exchange Agreement and assigns the purchase and sale agreement to First American Exchange Company as intermediary, causing intermediary to be substituted in his stead as seller.
5. Intermediary issues escrow closing instructions directing that Taxpayer be shown as grantor transferor on a direct deed to the buyer of the relinquished property.
6. The first half of the exchange closes with the transfer of the relinquished property - the time periods begin to run.
7. First American Exchange Company as intermediary deposits the net proceeds from the sale of the relinquished property into an interest-bearing qualified escrow account. Taxpayer is entitled to receive a "growth factor" from intermediary in the same amount as the earnings on the net proceeds received by intermediary during the exchange.
8. First American Exchange Company confirms receipt of th e funds to Taxpayer, informs Taxpayer of his/her deadlines under the exchange, and provides an identification notice form for Taxpayer's use in identifying replacement property(ies).
9. Taxpayer identifies replacement property(ies) by signing and forwarding the identification notice to intermediary on or before the 45th day after the transfer of the relinquished property.
10. Taxpayer enters into an agreement to purchase the replacement property.
11. Once all contingencies under the purchase agreement are satisfied, and at or before the closing of the acquisition of the replacement property, Taxpayer assigns the purchase agreement to intermediary causing intermediary to be substituted in his stead as buyer of the replacement property.
12. Intermediary issues escrow/closing instructions directing that Taxpayer be shown as grantee/ transferee on a direct deed from the seller of the replacement property.
13. The final portion of the exchange closes concurrently with acquisition of the replacement property (or in stages if multiple replacement properties are involved), all on or before the 180th day after transfer of the relinquished property or the due date (including extensions) of Taxpayer's tax return, whichever is earlier.
14. Intermediary provides Taxpayer with a statement showing all activity on his account.
15. Taxpayer files Form 8624 with the IRS (and, depending on state law, equivalent documentation with state tax authorities).

Did You Know?