Guardian Title - What is a 1031 Tax-deferred Exchange?

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What is a 1031 Tax-deferred Exchange?

Nature of an Exchange

Due to significant changes in the tax laws over the last decade, Tax-deferred Exchanges of Real Property under Section 1031 of the Internal Revenue Code are one of the few remaining shelters for real estate investors. As a qualified intermediary, Guardian Exchange Services, LLC. is available to facilitate these exchanges.

A taxpayer interested in "exchanging" investment properties should immediately contact a qualified intermediary. Specific language must be added to the sales contract identifying the sale as an "exchange" prior to the signing of the contract. In addition, the taxpayer must enter into a trust agreement with the intermediary prior to the closing of the exchange (relinquish) property. Upon closing of the relinquished property, the exchange party has 45 days to identify the replacement property and 180 days to close its sale.

Guardian Exchange Services will work with your tax advisor or attorney to prepare the necessary documentation, which generally included an exchange agreement, assignments and indemnity agreements for all properties involved in the exchange.

Disposition of Funds and Fees

Guardian Exchange Services will hold and invest funds from the sale of the relinquished property pursuant to the terms of the Exchange Agreement. Under the new IRS regulations, a "Growth Factor" equal to the total interest earned on the funds can be received by the taxpayer.

This interest can be used to offset the expenses incurred for the transaction. In addition to being utilized to pay for services rendered by Guardian Exchange Services, these funds can help pay for other expenses, including: title fees, escrow fees, transfer taxes and recording fees for both the relinquished property and the replacement property.

10 Most Commonly Asked Questions
about Tax Deferred Exchanges

1. Who is eligible for an exchange?
Any taxpayer looking to defer the taxable gain realized upon the sale of investment property or property used in trade or business.

2. How is an investment property defined?
Any property that is not considered a principle place of residence and is used to generate income now or in the future (e.g. rental houses, commercial buildings, undeveloped land).

3. Why enter into an exchange?
Due to the tax reform acts of the 1980ís, one of the only ways left to avoid the capital gains tax is to enter into an exchange. The exchange does not eliminate the capital gains tax, but defers it.

4. How do you enter into an exchange?
Contact a qualified intermediary, such as Guardian Exchange Services, prior to the sale of the relinquished property.

5. Is there a limit to the number of exchanges possible?
No. The capital gains tax can be deferred each time an exchange is properly completed.

6. Do the properties being exchanged have to be alike?
No. The only qualification is that real estate be exchanged for real estate (e.g. a two family property may be exchanged for vacant land).

7. Do I need to know the property I am going to acquire prior to the sale of my investment property?
No. The replacement property does not have to be identified until 45 days after the close of the exchange property.

8. How quickly does the exchange need to be complete?
The exchange generally must be completed within 180 days after the sale of the exchange property. However, the replacement property must be acquired before the earliest of either 180 days after the transfer of the exchange property or the due date of the taxpayer’s return.

9. During the 180 days waiting period, can the funds be invested?
Once the proceeds from the sale of the investment property have been deposited with a qualified intermediary such as Guardian Exchange Services, the funds may be invested upon request.

10. Why use a qualified intermediary?
In order to take advantage of the tax deferring benefits of these exchanges, the IRS requires the use of a qualified intermediary. This is the government’s way of ensuring that the taxpayer is not in actual or constructive receipt of the cash proceeds realized from the sale of the exchange property.

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