A delayed change occurs when there is a fracture in date between selling one Belongings and buying another. A build-to-suit change allows the investor To erect on or cause improvements to the Belongings lifetime purchased. A reverse alter occurs in reverse order--first a Belongings is bought, then one is sold.
In this replace, a third party--called a experienced intermediary--holds the process resulting from a Belongings sale until it is levy into the invest in of another Belongings. An modify Treaty occurs between the adult undertaking the alter and the examined middleman.
Different Types of Exchanges
A simultaneous interchange occurs when one Belongings is sold and another is bought at the identical allotment.A 1031 alternate Treaty is most regularly used in the sale and get of rental Belongings.Reduce 1031 of the Internal Revenue Decree allows the alternate of investment or episode Belongings without fee of finance gains impost. It is most usually used in the buying and selling of rental de facto estate, although personal Belongings (livestock, interpretation Accoutrement, aircraft) and qualifies. A adept middleman, and since an alter Treaty, is needed in any of these types of exchanges whether any beans from the sale of one Belongings needs to be transfered to the get of another Belongings.
The Process
In the most common type of exchange--a delayed exchange--a property is sold, the qualified intermediary holds the money that comes out of the sale, and then turns it over to the escrow or other closing account associated with the replacement property purchase. There are strict time limits associated with the exchange: The exchanger has 45 days from sale of the relinquished property to identify the replacement property and 180 days from sale to take title to the replacement property. If these deadlines are missed, the exchange is invalidated. The new purchase can still occur, but the exchanger will have to pay taxes on the sale of the relinquished property.
Qualified Intermediary
Not surprisingly, the IRS does not allow the exchangers themselves to hold the money obtained from the sale of their property or to self-document that the required time limits were met. For these tasks, a qualified intermediary--also called an exchange facilitator--is required. Intermediaries are not licensed or otherwise regulated by the IRS; however, they cannot be a relative of the exchanger or an attorney, accountant or real realtor who has worked for the exchanger in the past two years.
The Agreement
A written exchange agreement between the qualified intermediary and person undertaking the exchange is necessary to document that all the requirements of Section 1031 have been met. This agreement strictly limits the investor's rights to get or borrow the money coming out of the property sale.
Pros and Cons
The chief advantage of the 1031 exchange to the investor is obvious and substantial. He avoids owing taxes on the profit of the relinquished property until or unless the replacement property is sold outright (that is, without another 1031 exchange). If the replacement property is never sold, tax is never paid. This can amount to thousands upon thousands of dollars in savings to the exchanger. Exchange disadvantages are few.
The adjusted basis (that is, the property value for tax purposes) of the replacement property is reduced by the profit generated by the sale of the relinquished property. This ensures that if the replacement property is ever sold without another exchange, taxes will be paid on both replacement property and the relinquished property. This amounts to a delay in paying taxes rather than a complete avoidance. But even a delay can be a benefit in most circumstances. Additionally, if the exchange time limits required by the IRS are not met, the investor will have had to pay a fee to the qualified intermediary without receiving a benefit.
