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04/10/2311
1031 EXCHANGE
RAMSEY A. BAHRAWY, ESQ.
04/10/23 2
WHAT IS IT?
• A TAX DEFERRED EXCHANGE AUTHORIZED AND DEFINED BY SECTION 1031 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED.
• 1031 EXCHANGE DEFERS TAXES DOES NOT ELIMINATE TAXES
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LANGUAGE OF IRC SECTION 1031
• NO GAIN OR LOSS SHALL BE RECOGNIZED ON THE EXCHANGE
• OF PROPERTY HELD FOR PRODUCTIVE USE IN A TRADE OR BUSINESS OR FOR INVESTMENT
04/10/23 4
LANGUAGE OF IRC SECTION 1031
• IF SUCH PROPERTY IS EXCHANGED SOLELY FOR PROPERTY OF LIKE KIND
• WHICH IS TO BE HELD EITHER FOR PRODUCTIVE USE IN A TRADE OR BUSINESS FOR INVESTMENT.
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EXCHANGE TERMS
• EXCHANGER
• INVESTMENT PROPERTY
• LIKE KIND PROPERTY
• RELINQUISHED PROPERTY
• REPLACEMENT PROPERTY
• IDENTIFICATION PERIOD
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EXCHANGE TERMS
• IDENTIFICATIONLIST
• EXCHANGE PERIOD
• CONSTRUCTIVE RECEIPT
• SAFE HARBOR
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WHAT IS SAFE HARBOR?
• PROCESS TO AVOID ACTUAL OR CONSTRUCTIVE RECEIPT OF MONEY
• MOST COMMON SAFE HARBOR IS THE QUALIFIED INTERMEDIARY
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KEYS TO A SUCCESSFUL EXCHANGE
• EXCHANGER SELLS RELINQUISHED PROPERTY WHICH WAS USED FOR BUSINESS OR INVESTMENT PURPOSE
• CONSIDER CONVERSION
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KEYS TO A SUCCESSFUL EXCHANGE
• EXCHANGER MUST ACQUIRE LIKE KIND REPLACEMENT PROPERTY.
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KEYS CONT’D
• EXCHANGER CAN NOT RECEIVE OR CONTROL THE PROCEEDS OR OTHER BENEFITS.
• ALL NET EQUITY TRANS-FERRED TO RELINQUISHED PROPERTY
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KEYS, CONT’D
• RELACEMENT PROPERTY MUST BE OF SAME OR GREATER VALUE AS RELINQUISHED PROPERTY.
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KEYS, CONT’D
• ADD EXCHANGE COOPERATION CLAUSE TO P&S;
• EXCHANGE AGREEMENT WITH QUALIFIED INTERMEDIARY PRIOR TO CLOSING ON RELINQUISHED PROPERTY.
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WHAT IS LIKE KIND PROPERTY
• LIVESTOCK
• MOTOR VEHICLES
• AIRCRAFT
• BOATS
• REALTY
• FURNITURE
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EXAMPLES: EXCHANGE OF LIKE KIND REALTY
• VACANT LAND FOR IMPROVED LAND
• 1 FAMILY FOR OFFICE BUILDING
• 2 FAMILY FOR RETAIL PROPERTY
• CONDO FOR INDUSTRIAL PROPERTY
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WHAT PROPERTY IS EXCLUDED FROM A LIKE KIND EXCHANGE
• STOCK IN TRADE
• INVENTORY
• SHARES OF STOCK
• NOTES
• BONDS & SECURITIES
• INTERESTS IN PARTNERSHIP
04/10/23 16
CONTROL VIOLATES IRC SECTION 1031
• TO AVOID ISSUES OF CONTROL CERTAIN PERSONS ARE EXCLUDED FROM ACTING FOR AN EXCHANGER
– “RELATED PARTIES”
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CONTROL VIOLATES IRC SECTION 1031 CONT’D
–EMPLOYEE; ATTORNEY; REAL ESTATE BROKER OR AGENT; ACCOUNTANT; INVESTMENT BANK OR BROKER - 2 YEARS PRIOR TO TRANSFER.
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CONTROL VIOLATES IRC SECTION 1031 CONT’D
–EXCEPTIONS: ROUTINE FINANCIAL; TRUST TITLE, INSURANCE OR ESCROW SERVICES; EXCHANGE SERVICES.
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CLOSING COSTS ALLOWED IN AN EXCHANGE
• BROKERS COMMISSION
• DIRECT ATTORNEY FEE
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CLOSING COSTS AND EXCHANGE
• TITLE INSURANCE PREMIUMS
• RECORDING FEES
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CLOSING COSTS AND EXCHANGE
• ESCROW OR CLOSING AGENT FEES
• QUALIFIED INTER-MEDIARY FEES
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USUAL TYPES OF EXCHANGES
• DELAYED
• SIMULTANEOUS
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TIME LIMITS FOR DELAYED EXCHANGE UNDER IRC SECTION 1031
• TIME LIMITS ARE SPECIFC AND INFLEXIBLE;
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TIME LIMITS FOR DELAYED EXCHANGE UNDER IRC SECTION 1031
• FROM CLOSING OF RELINQUISHED PROPERTY EXCHANGER HAS 45 DAYS TO IDENTIFY REPLACEMENT PROPERTY;
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TIMELINE FOR DELAYED EXCHANGE CONT’D
• IDENTIFICATION OF REPLACEMENT PROPERTY MUST BE IN WRITNG, AKA PROPERTY ID LIST.
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TIMELINE FOR DELAYED EXCHANGE CONT’D
• AFTER 45 DAYS THE EXCHANGER MAY NOT CHANGE THE PROPERTY IDENTIFICATION LIST;
• IF EXCHANGER CHANGES LIST TAX DUE!
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IRC 1031 TIMELINE FOR DELAYED EXCHANGE CONT’D
• THE PURCHASE OF REPLACEMENT PROPERTY MUST BE COMPLETED WITHIN 180 DAYS AFTER THE CLOSE OF THE RELINQUISHED PROPERTY.
• MARRIED COUPLE – over $1,500,000
• MARRIED WITHOUT CHILDREN
• MARRIED TO NON US CITIZEN
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EXAMPLE OF TIMELINE FOR DELAYED EXCHANGE
• CLOSING ON RELINQUISHED PROPERTY - MAY 9, 2006
• EXCHANGER HAS 45 DAYS OR UNTIL JUNE 22, 2006 TO IDENTIFY A REPLACMENT PROPERTY IN WRITING.
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EXAMPLE OF TIMELINE FOR DELAYED EXCHANGE
• CLOSING ON REPLACEMENT PROPERTY MUST OCCUR NO LATER THAN- NOVEMBER 8, 2006 (180 DAYS FROM MAY 9, 2006 ).
04/10/23 30
EXCHANGE & TITLE
• RELINQUISHED & RELACEMENT PROPERTY MUST HAVE SAME TITLE
• A CHANGE IN TITLE DEFEATS TAX DEFERAL
04/10/23 31
EXAMPLES OF TITLE
• ABC TRUST RELINQUISHES ABC TRUST MUST ACQUIRE
• JOHN JONES, AN INDIVIDUAL RELINQUISHES JOHN JONES, AN INDIVIDUAL, MUST ACQUIRE.
04/10/23 32
EXCHANGE & TITLE
• A LENDER MAY REQUIRE A TITLE CHANGE BY ADDING A SPOUSE OR MOVINGTITLE TO AN INDIVIDUAL NAME FROM AN ENTITY NAME.
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ADDITIONAL TECHNICALITIES
• LLP, LLC
– CAN NOT TAKE ADVANTAGE OF EXCHANGE UNLESS LLC OR LLP OWNS 100% OF THE INVESTMENT
• MIXED USE
– EXCHANGE ONLY VALID FOR BUSINESS USE PORTION
04/10/23 34
ADDITIONAL TECHNICALITIES
• VACATION & SECOND HOMES
– IF PROPERTY DOES NOT PRODUCE CURRENT INCOME DOES NOT QUALIFY
• IDENTIFICATION
– EXCHANGER PERMITTED TO IDENTIFY 3 PROPERTIES OF UNLIMITED VALUE
04/10/23 35
ADDITIONAL TECHNICALITIES
• IDENTIFICATION OF MORE THAN 3 PROPERTIES
– TOTAL FAIR MARKET VALUE OF PROPERTY BEING IDENTIFIED CANNOT EXCEED 200% OF FAIR MARKET VALUE OF THE RELINQUISHED PROPERTY
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EXCHANGE SCENARIOS
EXAMPLES
• RELINQUISHED
• VALUE - $200,000
• MTG - $100,000
• EQUITY - $100,000
• REPLACEMENT
• $350,000.00
• $250,000.00
• $100,000.00
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EXCHANGE SCENARIOS
EXAMPLES
• RELINQUISHED
• VALUE - $200,000
• MTG - $100,000
• EQUITY - $100,000
• REPLACEMENT
• $350,000.00
• $260,000.00
• $ 90,000.00
• $10,000.00 TAXABLE
04/10/23 38
EXCHANGE SCENARIOS
EXAMPLES
• RELINQUISHED
• VALUE - $200,000
• MTG - $100,000
• EQUITY - $100,000
• REPLACEMENT
• $200,000.00
• $ 80,000.00
• $120,000.00
• $20,000.00 TAXABLE
04/10/23 39
CONCLUSION
TAX SAVINGS DETERMINED BY KNOWING/FOLLOWING THE RULES.• PROFESSIONAL TEAM CONCEPT -
IMPORTANT TO CONSULT WITH YOU LEGAL AND FINANCIAL PROFESSIONALS;
• ENLIST AN EXPERIENCED INTERMEDIARY TO SUCCESSFULLY COMPLETE THE TRANSACTION.
04/10/23 40
REVIEW
• ARRANGE FOR SALE OF PROPERTY AND INCLUDE EXCHANGE LANGUAGE IN P&S
• SIGN AGREEMENT WITH QUALIFIED INTERMEDIARY
• SIGN OVER DEED TO Q.I.
04/10/23 41
REVIEW
• AT CLOSING NET SALE PROCEEDS PAID TO QI
• WITHIN 45 DAYS IDENTIFY PROPERTY OF LIKE KIND TO BE ACQUIRED
04/10/23 42
REVIEW
• WITHIN 180 DAYS OF SALE PURCHASE ONE OF THE PROPERTIES ON THE IDENTIFICATION LIST AND COMPLETE THE EXCHANGE.
04/10/23 43