Rancho Santa Fe Exchange, LLC.

Rancho Santa Fe Exchange, LLC.
701 Palomar Airport Road, 3rd Floor
Carlsbad, CA 92011
760.931.5646 tele
760.931.4795 fax
888.280.1031 toll free
www.rsfexchange.com

Real Estate IRC Section 1031 Tax-Deferred Exchanges:

- Forward "Like-Kind" Exchange click to read more.

- Reverse Exchanges click to read more.

- Personal Property Exchanges click to read more.

- Multiple Asset Exchanges click to read more.

- Build-to-Suite Exchanges click to read more.

Forward “Like-Kind” Exchange: Is also known by other terms, such as, “Starker” exchange, delayed exchange, deferred exchange or simultaneous exchange. A forward “like-kind” exchange is a transaction where a taxpayer sells an investment property, called the relinquished property, and later receives “like-kind” property, otherwise known as the replacement property. “Like-kind” is a very broad category where real properties can be located anywhere in the US with exchanges taking place in one or more states. “Like-kind” refers to the nature or character of the property, not its grade or quality. It makes no difference if the property is improved or unimproved. The use of a Qualified Intermediary (also known as an Accommodator? or Facilitator?) is the most common method used to complete a valid delayed exchange quickly and easily. The Qualified Intermediary is an independent party to the exchange transaction, that performs the function of creating the reciprocal trade of properties for the exchange, holds the exchange funds and supplies the necessary exchange documents, such as the Exchange Agreement, Assignments and Closing Instructions.

The taxpayer assigns the rights in the Sale Contract for the relinquished property and in the Purchase Contract for the replacement property to the Qualified Intermediary, who essentially becomes the seller of the relinquished property and the buyer of the replacement property. To avoid actual or constructive receipt of the exchange funds by the taxpayer, the proceeds from the sale of the relinquished property are held by the Qualified Intermediary until they are needed for the acquisition of the replacement property.

In both simultaneous and delayed exchanges in which a Qualified Intermediary is used to create the reciprocal exchange of properties the IRS allows direct deeding of the relinquished property from the taxpayer to the buyer and of the replacement property from the seller to the taxpayer, thereby avoiding the necessity of the Qualified Intermediary holding title to any property. Direct deeding avoids the assessment of double state, county, or local documentary transfer taxes and any liability on the part of the Qualified Intermediary for environmental hazards that may exist on the property. The taxpayer must identify the replacement property to be acquired by the end of the Exchange Period within 45 days of the transfer of the first relinquished property. Also, the taxpayer must receive all replacement property or properties within the earlier of 180 days after the date on which the taxpayer transferred the first relinquished property, or the due date (including extensions) for the taxpayer's tax return for the tax year in which the transfer of the first relinquished property occurs. These time periods are very strict and cannot be extended even if the 45th day or 180th day falls on a Saturday, Sunday or legal holiday.

The proper identification of replacement property or properties is critical and if not made in a timely manner the exchange fails and the entire transaction is taxable. The rules are as follows: (1.) the replacement property identification must be in writing and signed by the taxpayer, (2) it must be delivered by mail, fax or hand delivery to a party to the exchange transaction (usually the Qualified Intermediary) by midnight of the 45th day, (3) the replacement properties must be unambiguously described, such as by a street address, tax lot number, legal description or the like, and (4) the taxpayer may list up to three (3) properties of unlimited value, but if more than three properties are listed, their total aggregate fair market value may not exceed 200% of the aggregate fair market value of the relinquished property. It is essential in a delayed exchange to adhere to these rules and deadlines established for identifying and acquiring the replacement property. Failure to comply with these rules may result in a failed exchange.

Reverse Exchanges: Which is sometimes called a “Parking Arrangement”. A reverse exchange occurs when a taxpayer acquires a “Replacement” property before selling “Relinquished” property. In a reverse exchange, the taxpayer cannot own both the relinquished property and replacement property at the same time – it is not allowed. The actual acquisition of the “Parked” property is done by an Exchange Accommodation Titleholder (EAT) or “Parking Entity”. The EAT is an independent 3^rd party that acts to facilitate a “Parking Arrangement” in a “Reverse Exchange”.

In a reverse exchange the taxpayer must acquire their “like-kind” replacement property before disposing of a relinquished property. Until recently it was unclear whether reverse exchanges would be given non recognition treatment by the IRS. On September 15, 2000, the IRS in the form of Revenue Procedure 2000-37 (Rev. Proc. 2000-37) provides that tax deferral on reverse exchanges will be recognized if the transactions fall within the scope of an announced IRC 1031 safe harbor. The new reverse exchange rules can be expected to lead to two categories of reverse exchanges, those that fit neatly within the safe harbor guidelines and those that do not fit within the safe harbor rules.

In a reverse exchange structured under the safe harbor protection, the entity used to facilitate a reverse exchange is the Exchange Accommodation Titleholder (EAT), and the property held by the EAT is the “Parked Property”. The EAT will usually form a special purpose entity (the Holding Entity) to take title to the parked property. To complete a reverse exchange the Holding Entity can take title to either the relinquished property or the replacement property under a Qualified Exchange Accommodation Agreement (QEAA), which is the document between the taxpayer, EAT and the Holding Entity. The durational limit on safe harbor transactions is taken from those of a delayed exchange, which by statute must be completed within the lesser of 180 days after the Holding Entity acquires the parked property or the due date of the taxpayer's tax return for the year in which the relinquished property is transferred. Additionally, under a safe harbor reverse exchange the Exchanger must identify one or more relinquished properties within 45 days after the Holding Entity acquires the replacement property. Rev. Proc. 2000-37 adopts the same identification rules that apply in delayed exchanges, which require written identification be delivered to another party to the exchange, such as the Holding Entity, EAT or the Qualified Intermediary, and limits the number of alternative and multiple properties that can be identified.

Personal Property Exchanges: The Treasury Regulations provide for the exchange of personal property held for productive use in a trade or business. For the taxpayer to qualify for 1031 exchange treatment, personal property assets must be either “like-kind” or “like class”. Tangible depreciable personal property is considered "like class" if it falls within the same General Asset Class or Product Class. Similar to real property exchanges, a personal property exchange provides the opportunity to defer capital gains taxes and depreciation recapture. However, for personal property exchanges, depreciation recapture may be of much more concern than it is in real property exchanges due to the shorter depreciation periods allocated to personal property. Personal property exchanges are much more restrictive than real property exchanges with regard to the interpretation of like kind or like class. Consult with your legal and/or tax advisors with regard to your exchange transaction. Exchanges involving tangible depreciable or non-depreciable personal property assets include assets, such as, aircraft, marine vessels, fleet vehicles, construction equipment, office furniture and equipment, hotel furnishings and equipment, restaurant equipment, artwork and coin collections, franchise licenses, professional sports contracts, books, music and software copyrights and livestock.

Multiple Asset Exchanges: The taxpayer can own property that consists of both real and personal property, such as a hotel or restaurant. An exchange of such a multiple asset property creates issues when trying to allocate the various assets into their proper “like-kind” categories using a property-by-property comparison. The allocation of the deferred gain and basis among the various exchanged assets also creates other issues. By utilizing a multiple asset exchange structure the taxpayer can realize a greater benefit than if they had structured the transaction as separate exchanges for each various type of asset. Real property can only be exchanged for other real property and personal property assets can only be exchanged for other personal property assets since real property and personal property are not “like-kind” to each other. The exchange experts in Rancho Santa Fe Exchange Company (RAFEC) will work closely with your tax, accounting and legal advisors to structure a multiple asset or fleet exchange program that best suits your business profile and implementation schedule. The exchange specialists in the RSFEC will work closely with your tax, accounting and legal advisors to structure a multiple asset exchange program that best suits your business profile and schedule.

Build-to-Suite Exchanges: The build-to-suit exchange, also referred to as a construction or improvement exchange, gives the taxpayer the opportunity to use all or part of the exchange funds for construction of the replacement property and still accomplish a tax-deferred exchange. This is a variation of the delayed or reverse exchange that allows the taxpayer more flexibility and provides the taxpayer with the opportunity to either renovate an existing improved property or construct a new improvement on raw land. In the most common type of build-to-suit exchange the taxpayer sells the relinquished property in a delayed exchange and then acquires the replacement property after it has been improved with the exchange funds from the relinquished property. It is important to note that any improvements made to the replacement property after the taxpayer takes title are considered to be goods and services. These goods and services are not considered “like-kind” property and are taxable as boot, the same as any remaining exchange funds. Consequently, to be included in the exchange any improvements to the property must occur before the taxpayer takes title. If the taxpayer decides to include construction on the replacement property as part of the exchange, one option is to contract with the seller to have the construction completed by the seller or a contractor before the transaction closes and then the taxpayer takes title to the property.

Escrow holdback accounts do not work for build-to-suit exchanges. Another option is for the taxpayer to negotiate with a builder to purchase the replacement property for the purpose of completing the construction, and then when the replacement property is finished the taxpayer can sell the relinquished property in an exchange and buy the improved property from the builder to complete the exchange. It is important to remember that all applicable rules of IRC 1031 apply equally to build-to-suit exchanges, in that the taxpayer has 45 days to properly identify the replacement property and no more than 180 days to acquire the identified improved replacement property. Also, to have a totally tax-deferred exchange, the taxpayer must acquire replacement property that is of the same or greater value as the relinquished property and use all of the exchange equity in the acquisition price of the replacement property, and the construction of the improvements.

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