1031 Exchanges

Section 1031 of the Internal Revenue Code provides a mechanism where by a property owner may defer the payment of income tax realized on the sale of the first property. It is important to note that tax is deferred until a later date, it does not create an exemption of deduction. The deferral date is typically the date on which the property-owner divests the second property that was exchanged for the original property. The property sold and the property purchased must be investment properties of “like-kind.” According to the IRS, “properties are of like kind if they are of the same nature or character, even if they differ in grade or quality.”

Qualifying properties must be in the United States and must be for investment or business purposes. The property purchased must be of equal or greater value; that is, the purchase cost of the replacement property must at least equal the adjusted sales price of the relinquished property and all funds from the property sold must be applied to the purchase of the exchanged property. One notable exception is that the principal residence exclusion may be combined with the use of the 1031 exchange for a property that was mixed use; part residence, part investment property.

The first step in determining if a 1031 exchange is an appropriate tax strategy for you is to contact your accountant or CPA. However, if you know you are going to roll income from the sale of your property into the purchase of a new property and you just have questions about how to proceed with the 1031 exchange, you may simply contact us here at Excalibur and we will answer any questions you may have about the logistics of closing a 1031 exchange.

Cost is a common element in the decision-making process. 1031 exchanges are more expensive than standard real property sale settlements because the IRS requires that an independent third party know as a Qualified Intermediary (QI) become involved in the transaction to collect the funds from the sale of the relinquished property and disburse them in the acquisition of the replacement property. The QI naturally charges a fee for its services. From the perspective of the title agent/settlement company however, the fees involved in handling a settlement in a 1031 exchange are no higher than for any other sale or purchase transactions.

Upon receipt of your title order, we will contact on of our QI’s to initiate the exchange process. A QI typically charges a flat fee that ranges from seven hundred and fifty dollars to two thousand dollars. As with any product or services, especially professional services, you get what you pay for and therefore in attempting to save a few hundred dollars in fees may cost you thousands later to fix what your bargain basement professional did improperly. In accordance with Excalibur’s stated values and mission, we only do business with other companies and vendors who share our commitment to excellence and professionalism. The average fee charged by the QI’s with whom we do business is about one thousand five hundred dollars.

Upon placing the order with the selected QI, we will Receive several documents from them. The first is an addendum to the sale contract, in which you assign the sale contract to the QI. By rule, the QI must actually receive the property from you and convey the property to the purchaser. This is accomplished by assigning the contract and does not involve the use of a deed. You then have forty-five (45) days in which to indemnify the replacement property.

Upon identifying the replacement property you have an additional one hundred eighty (180) days to actually close on and receive the replacement property. When the contract on the replacement property is signed, another addendum is required that again allows the QI to receive the replacement property and convey it to you, the purchaser.

The information provided above is a summary of salient points pertaining to the subject of 1031 exchanges and is not intended to constitute an exhaustive or complete restatement of the laws and regulation governing 1031 exchanges. Laws and regulations may change at any time, the content of this web site may therefore be obsolete or otherwise inaccurate as a result, and Excalibur therefore does not warrant the accuracy of the information provided and has no obligation to update or correct the information provided. Excalibur recommends that you consult your financial adviser or accounting professional for professional guidance and advice in this area, and then contact Excalibur Title and Escrow, LLC to order title and schedule your 1031 exchange settlement.