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TAX DEFERRED EXCHANGE SERVICES
Why Should Realtors Be Interested In Tax Deferred Exchanges? Tax deferred exchanging is an investment strategy that should be considered each time an owner decides to sell real estate that has been held for two or more years as investment or income producing property. Anyone involved in advising or assisting real estate investors, including real estate agents, should know about tax deferred exchanges. What many real estate agents forget, however, is that every tax deferred exchange involves two sales, not just one. Thus, identifying investors that are candidates for tax deferred exchanges can be beneficial to the customer as well as to the real estate agent. What is a Tax Deferred Exchange? A tax deferred exchange, sometimes incorrectly referred to as a tax free exchange, is a method by which a property owner sells or trades one investment or income producing property for another. In an ordinary transaction the gain realized on the sale would be taxed at capital gains rates by the state and federal government. In a qualifying tax deferred exchange the tax on the gain realized on the sale is deferred until some time in the future. Tax deferred exchanges are authorized under Section 1031 of the Internal Revenue Service Code. The requirements set forth in this section must be carefully met, otherwise the exchange will not qualify for deferred tax treatment and the transaction will be taxed. The transaction must be formatted in such a way that it is in fact an exchange of one property for another, rather than the taxable sale of one property and the purchase of another. Misunderstanding the tax deferred exchange. Most sellers and many real estate agents do not fully understand the true nature of the tax deferred exchange and thus feel uncomfortable becoming involved. Many are misinformed about the requirements or feel that the process is too cumbersome. With the assistance of corporate qualified intermediaries the process has been simplified for the seller, buyer and real estate agent. There is little reason not to consider the tax deferred exchange. When an investment property has appreciated in value (or has been depreciated for tax purposes ) a sale of the property could result in a taxable gain. The taxpayer can pay up to 15% in federal capital gains tax. The tax deferred exchange can defer these taxes to a year in which taxpayer has losses or is in lower tax bracket. The gain can be deferred and could continue through any number of exchanges. In addition, the tax deferred gains can be used to purchase more property. What kind of property qualifies for a tax deferred exchange The property must be held for productive use in trade or business or for investment. Excluded is property held primarily for resale ( “Stock In Trade” ) such as new lots in a subdivision or a recent condominium conversion and it does not include interests in partnership ( as opposed to common ownership ). The property should be held for at least two years prior to the sale ( although the IRS has not acknowledged this, or any other holding period, as qualifying ). It is also advised that the replacement property to be purchased in the exchange also be held for two years after the sale so as not to subsequently disqualify the transaction. The Qualified intermediary The IRS requires that the exchange be handled through a qualified intermediary defined as a disinterested third party. Those that do not qualify as disinterested third parties are any parties related to the taxpayer as well as the taxpayer's attorney, broker, agent, employee, or accountant with a relationship with the taxpayer within the last two years. When consulting with a customer about tax deferred exchanges it is essential that the taxpayer realize the significance of the role of the intermediary and the consequences of their actions. Since the proceeds from the sale must remain with the intermediary pending the purchase of the replacement property choosing the wrong intermediary can have significant economic consequences. Likewise, picking an intermediary that is not prepared to deal with holding of escrows and execution of statements in the exchange may end up costing the taxpayer significantly more. Companies such as the First American Exchange Company act as secure intermediaries and can handle these transactions with ease while providing you and your customer with all of the materials that you might need. Timeline Upon sale of the relinquished property the seller/taxpayer has 45 days to identify the replacement property. The seller then has 180 days from the date of the sale of the relinquished property or until the date for filing of his federal tax return with extension, whichever comes first, to close on the replacement property. Within this timeline notices and agreements must be signed and the proceeds held by the intermediary.
How does one identify the replacement property or properties? Section 1031 allows you to choose a replacement property by using any one of the following three rules:
What's the next step Learn more about the tax deferred exchange. Simple plain English materials are available that will help you understand this type of transaction in more detail. Start by finding a well respected qualified intermediary. Think of the tax deferred exchange as a means for making two sales happen out of one while saving tax dollars for your customer. Use this device as a marketing tool to your commercial customers and as a way of developing new customers. The First American Exchange Company can help you with all of your questions and deferred tax exchange needs. Just call Nichole Nunes at 888-729-1031.
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