1031 Exchange Blog

1031 EXCHANGE GENERAL

Millennial Monopoly | How to Get into the Real Estate Game

10/19/21

Growing up, you collect the deed to the Reading Railroad, State Avenue, and Park Place to then realize it’s ...

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<h2>Overview</h2>

Growing up, you collect the deed to the Reading Railroad, State Avenue, and Park Place to then realize it’s not quite as simple as a roll of the dice. The advantages and profitability of real estate investments have become more well-known and popular in recent years. Markets are getting hotter while younger people are trying to buy instead of rent, grow their wealth, and prepare for retirement. Throughout all industries, we see people looking for additional sources of income through potential rental properties. Although a great strategy and likely a lucrative venture, not everyone can invest the time and resources to managing an apartment complex, an Airbnb, an office building, or another property that requires regular oversight. For a young entrepreneur, apart from the daily challenges, current prices make it difficult to afford one let alone several investment properties. But that does not mean there are not options for those still interested. There are ways to partake in the real estate industry at an affordable price without committing to the sole responsibility. Through fractional real estate, individual investors can purchase a percentage of commercial real estate ownership that would otherwise be unattainable.

<h2>Fractional Ownership</h2>

Fractional ownership is an investment structure that allows multiple investors to purchase percentage ownership in an investment-grade asset. In the United States, there are two primary options for those interested in fractional real estate ownership:  Delaware Statutory Trust (DST) and Tenant-In-Common (TIC) ownership.

<h2>Tenant In Common Ownership</h2>

<a href="https://www.accruit.com/blog/drop-and-swap-or-swap-and-drop" target="_blank" title="tenancy in common">Tenancy in common</a> is the ownership of a real estate by more than one person. The Tenant-in-Common ownership was established in the 1990s. It is a form of shared tenure rights to properties owned. Each individual or tenant-in-common owns a separate interest in the property. The benefits include more buying power and shared responsibilities. A TIC also allows for continuous ownership if any other owner can no longer continue ownership, such as death or bankruptcy. An owner may sell his interest, initiate a sale, partition suit, or dissolve the tenancy in common. The TIC interest goes to the heirs of that owner rather than to the other tenants in common. The agreements between tenants in common usually deal with the sharing of expenses and provide one owner with the right to buy out the other owner when used. This ownership structure is a good option for potential investors who cannot afford a property’s total price and would like to share the property responsibilities.

<h2>Delaware Statutory Trusts</h2>

A <a href="https://www.accruit.com/blog/delaware-statutory-trusts-1031-exchange-in…; target="_blank" title="DST">DST</a> is a legal entity created as a trust in which each investor owns a “beneficial interest.” The DST was developed as a solution to some of the downfalls of a TIC. A TIC requires all the co-investors to agree on any action. It can only have a maximum of 35 investors, and lenders must underwrite all the borrowers within the TIC structure. A DST does not allow for any input from beneficial interest owners, meaning no need for unanimous agreement, the IRS does not have a stated limit for the number of investors a DST may have, and unlike in a TIC, a lender only underwrites a single borrower for a DST, making it easier to secure financing. The investor receives a deeded fractional ownership in the property in a percentage based upon the equity invested. These investments generally pay quarterly based on the excess rent over the property expenses, including mortgage payments. The rate of return varies from deal to deal based on the specifics of the property and financing. Typically, the sponsor knows the net rent that can be expected and can give the investor the anticipated return for the investment term. A DST is a great option for those who wish to diversify their portfolio by including some real estate elements. They allow individuals to rely on a specific return and avoid having to work directly with tenants.

<h2>Conclusion</h2>

The importance of financial literacy has been brought more attention through the growth of the internet and social media. Real estate investments are not just for moguls that purchase hotels or corporate executives buying shopping malls. There are many options for those young and old that want to diversify their portfolios, begin acquiring assets, or are already ready to upgrade their property. The standard fix and flip of houses has been a very well-known wealth-building strategy. The simple idea of buying a cheap home that needs fixing, making the repairs, and selling for a profit does sound like a piece of cake. Most of the time, the part that gets left out is how much you owe in taxes after receiving that money. Buying a house and making repairs also isn’t as attainable as it once may have been. It takes a lot of time and more money than what you’ll find in your piggy bank. Long-term investment in real estate and then exchanging for more can bring a much higher financial benefit, and it is a strategy that anyone can take advantage of. Yet, many don’t because they think they don’t qualify, can’t afford it, or believe it won’t make a difference, which is not true. It’s time to get into the real estate game, talk to a financial advisor to see if a TIC or DST may be right for you, and get your dice rolling.

Accruit’s team of experts are available to help answer questions, work through your <a href="https://www.accruit.com/property-owners/1031-exchange-explained" target="_blank" title="Start an Exchange with Accruit">1031 exchange</a> concerns, and facilitate exchanges in cases where it is advantageous. Contact Accruit by phone – <a href="tel:8002371031" title="(800) 237-1031">800-237-1031</a> or visit our <a href="https://www.accruit.com/blog">blog</a> to learn more.

Metatags:

Title:

Millennial Monopoly | How to Get into the Real Estate Game

10/19/21

Growing up, you collect the deed to the Reading Railroad, State Avenue, and Park Place to then realize it’s ...

How to Pull Off a Last-Minute 1031 Exchange

09/23/21

Trying to grow your real estate assets in fast-paced real estate markets can become overwhelming. Nearly every Qualified Intermediary (QI) ...

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Real estate investing has gained tremendous traction in the past few years.  More and more people are choosing to buy property for investment due to its strong risk / return profile.  Businesses continue to grow and expand, resulting in hot and competitive markets. Properties listed for sale can come under contract within hours.  Trying to grow your real estate assets in fast-paced real estate markets like Texas, Florida, California, or Colorado can become overwhelming.  Nearly every Qualified Intermediary or “QI” still leans on either a purely paper-based system or a makeshift software built for title work. These exchange methods are not only outdated but also inefficient.  Forms are subject to human error or get misplaced and sometimes they aren't even filled out. This is a costly error if an exchanger were the subject of an IRS audit.  Forms also take time, a highly sought-after commodity in fast-moving business transactions.

Ideally, a standard forward exchange would begin with the property owner reaching out to their QI before listing the property they would like to sell.  But every deal is different, and an exchange can become very complex very quickly.  A property owner may find themselves at the closing table ready to sell and an exchange needing to happen.  The pen and paper used by so many do not meet the criteria for a rush exchange, let alone a same-day one.

Accruit has more than 20 years of experience as a nationally recognized Qualified Intermediary and <a href="https://www.accruit.com/blog/leveraging-technology-1031-exchange" target="_blank" title="1031 exchange technology company">1031 exchange technology company</a>. As the first company to complete an exchange entirely over the internet, Accruit has successfully created and developed the patented 1031 exchange processing software, Exchange Manager Pro℠.  The new software reduces the time and increases the efficiency for QI’s processing exchanges.  For example, the property owner has a short time frame to complete an exchange so, they call Accruit to ask if we can get it done.  The answer is, yes, we turn it around in a few minutes using our <a href="https://www.accruit.com/property-advisors/managed-services" target="_blank" title="Accruit Exchange Manager Pro℠ Software">Exchange Manager Pro℠ software</a>.

The ability to provide rush and same-day exchanges is just one of the many reasons Exchange Manager Pro℠ makes Accruit stand out.  The cloud-based software increases security through two-factor authentication, document retention, and electronic signature capture.  Exchange Manager Pro℠ is built on a 1031 exchange rules-based system with wizards to help the client service professionals processing exchanges without constant oversight and feedback.  With an estimated increase of 2-3x the number of exchanges processed per person.  Users of Exchange Manager Pro℠ can spend more time working with clients and less time with administrative tasks.  Accruit holds the highest customer service score in the industry and our new software is another testament to the level of services and satisfaction we provide to our clients

Accruit is now extending these advancements to Title Companies, Qualified Intermediaries, Banks, Attorneys, and others.  There are options suited for every business's needs.  Take a look at our Exchange Manager Pro℠ plans - Exchange Facilitator, Managed Service and Software as a Solution.  Find the plan that best suits you and your business needs.

Exchange Facilitator clients using our automated software features can take advantage of Exchange Manager Pro℠ increased efficiencies, coupled with the depth of knowledge of Accruit’s team of professionals without having to become QIs themselves.  The Exchange Facilitator is an independent consultant and the main point of contact with exchangers regarding 1031 exchanges in the marketplace. Title Companies, Banks, Wealth Advisors and CPAs are often Exchange Facilitator’s.  Although Exchange Facilitator’s can be diverse in nature, they all have a common desire to focus their attention and resources on the growth of their core business while also participating in a value-added service for their customers.

Exchange Facilitator Plan Offers Unique Solutions to:

<ul>
<li>No more turning away business or referring to competitors</li>
<li>Provide a better customer experience</li>
<li>Drive a new revenue source</li>
</ul>

<a href="https://cta-redirect.hubspot.com/cta/redirect/6205670/7e7c17ab-6957-4a1…; target="_blank"><img alt="Exchange Facilitator Plan" class="hs-cta-img" id="hs-cta-img-7e7c17ab-6957-4a14-9054-a82c95420e0a" src="https://no-cache.hubspot.com/cta/default/6205670/7e7c17ab-6957-4a14-905…; style="border-width:0px;" /></a><script charset="utf-8" src="https://js.hscta.net/cta/current.js"></script><script type="text/javascript"> hbspt.cta.load(6205670, '7e7c17ab-6957-4a14-9054-a82c95420e0a', {"region":"na1"}); </script>

Managed Service clients can easily upload necessary documents and information through the cloud and allow Accruit and Exchange Manager Pro℠ to process the exchange.  This allows them to focus on their clients and enjoy a new line of revenue.  The Managed Service offering allows white-label processing, embedded Qualified Intermediary (QI) functionality and administration, reporting, tracking and funds management for <a href="https://www.accruit.com/blog/1031-real-estate-exchanges-what-like-kind&…; target="_blank" title="1031 like-kind exchanges">1031 like-kind exchanges</a>. These clients receive a custom branded QI as well as branded documents that flow through Exchange Manager Pro℠, a proprietary, online, secured application.  This allows clients to take time focusing on growing their customers and business with an extended brand offering.

Managed Service Plan Offers Unique Solutions to:

<a href="https://cta-redirect.hubspot.com/cta/redirect/6205670/03fd6d00-c069-45e…; target="_blank"><img alt="Managed Service Plan" class="hs-cta-img" id="hs-cta-img-03fd6d00-c069-45e2-bac8-3c5504f82206" src="https://no-cache.hubspot.com/cta/default/6205670/03fd6d00-c069-45e2-bac…; style="border-width:0px;" /></a><script charset="utf-8" src="https://js.hscta.net/cta/current.js"></script><script type="text/javascript"> hbspt.cta.load(6205670, '03fd6d00-c069-45e2-bac8-3c5504f82206', {"region":"na1"}); </script>

Software as a Service (SaaS) clients license Exchange Manager Pro℠ software and leverage it to power their exchange operations.  These clients tend to already be Qualified Intermediaries and are looking for the software to increase efficiencies, embed controls and security, and improve the customer experience.

SaaS Plan Offers Unique Solutions to:

<ul>
<li>Grow your business without increasing staffing</li>
<li>Eliminate use of contact sticky notes as deadline reminders</li>
<li>Turnaround exchanges quickly</li>
<li>Drive confidence in storage</li>
<li>Supports maintenance of exchange information</li>
</ul>

<a href="https://cta-redirect.hubspot.com/cta/redirect/6205670/c3f2f87f-ab0d-47a…; target="_blank"><img alt="Software as a Service (SaaS) Plan" class="hs-cta-img" id="hs-cta-img-c3f2f87f-ab0d-47aa-b5db-8f61fb6c25a1" src="https://no-cache.hubspot.com/cta/default/6205670/c3f2f87f-ab0d-47aa-b5d…; style="border-width:0px;" /></a><script charset="utf-8" src="https://js.hscta.net/cta/current.js"></script><script type="text/javascript"> hbspt.cta.load(6205670, 'c3f2f87f-ab0d-47aa-b5db-8f61fb6c25a1', {"region":"na1"}); </script>

Power your 1031 service offerings with Exchange Manager Pro℠. To learn more about our service offerings or selecting a plan that suits you, contact <a href="tel:8002371031" title="(800) 237-1031">800-237-103</a>1.

Metatags:

Title:

How to Pull Off a Last-Minute 1031 Exchange

09/23/21

Trying to grow your real estate assets in fast-paced real estate markets can become overwhelming. Nearly every Qualified Intermediary (QI) ...

Receipt of Funds in a 1031 Exchange

08/19/21

1031 Exchanges are a time-proven tax strategy that encourages the continuity of business investment. The benefits of 1031 like-kind exchanges are in ...

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Since 1921, the rules for qualifying and completing <a href="https://www.accruit.com/property-owners/1031-exchange-explained" target="_blank" title="1031 exchanges">1031 exchanges</a> have gradually broadened and become less restrictive. Even so, there are do's and don'ts, and several gray areas of which taxpayers should be aware. For the taxable gain to be deferred, specific and vital requirements must be satisfied:

<ul>
<li>The exchange must be equal or up in value </li>
<li>The exchange must follow the time limit and identification requirements</li>
<li>The taxpayer must hold the properties for business or investment purposes </li>
<li>The taxpayer must exchange properties </li>
<li>Properties must be "like-kind"</li>
<li>There must be no constructive or actual receipt of exchange funds:
<ul>
<li>It is a violation if the taxpayer or an agent for the taxpayer receives exchange funds or the taxpayer is directly or indirectly able to control the exchange funds during the exchange period</li>
</ul>
</li>
</ul>

<h2>Receipt of Funds</h2>

1031 Exchanges are a time-proven tax strategy that encourages the continuity of business investment. The benefits of <a href="https://www.accruit.com/blog/understanding-like-kind-requirement-1031-e…; target="_blank" title="1031 Exchange Explained">1031 like-kind exchanges</a> are in all areas of commerce. Like-kind exchanges are a tax deferral, NOT a tax avoidance. By deferring the taxes, property owners can reinvest that money back into the economy by applying the money towards a productive property, creating jobs for entry-level to top executive employees, housing opportunities, and more.

A <a href="https://www.accruit.com/blog/safe-harbors-core-section-1031-treasury-re…; target="_blank" title="safe harbor 1031 exchange">safe harbor provision in Section 1031</a> ensures the tax is deferred, not avoided is the regulation prohibiting the exchanger (or any agent) of the taxpayer to receive or control the funds from the sale of a property in an exchange. Because of this provision, the use of a qualified intermediary (QI) is required for a 1031 exchange to take place.

<h2>Choosing a 1031 Exchange Qualified Intermediary (QI)</h2>

In a forward exchange, the taxpayer and their chosen qualified intermediary (QI) set up and enter into what is called an “exchange agreement.” The exchange agreement is where the exchanger assigns their rights to sell the relinquished property to the QI. The QI can then sell the property the taxpayer wishes to exchange and hold the proceeds from the relinquished property sale in an exchange account. The taxpayer does not receive the funds, and their exchange is still valid.  These funds are kept in a secure account and will only be used to purchase the property the taxpayer has identified as a replacement. Once a replacement property is selected, the rights to acquire that property are assigned to the QI. The QI sends the funds held in a taxpayer's exchange account directly to the closing to purchase the replacement property, ensuring a smooth and valid 1031 exchange.

<h2>1031 Exchange Pitfalls to Avoid</h2>

<h3>Excess Funds</h3>

The identification period of a 1031 exchange refers to the first 45-days when a taxpayer identifies property they would like to acquire as a replacement to their relinquished property. It is common for a taxpayer to identify more than one potential replacement property, but only purchase one. If there are excess funds in the exchange account, the QI can return them once an exchange is complete. If the taxpayer has identified more than one potential replacement property the excess funds must remain in the exchange account until the end of the 180-day exchange period. Receiving funds before the end of the exchange period could jeopardize the entire exchange.

To prevent this situation, <a href="https://info.accruit.com/start-an-exchange" target="_blank" title="Start an Exchange with Accruit">Accruit</a> requires the taxpayer to indicate how many properties they intend to acquire. Once those transactions are complete, the funds can be returned.

<h3>Early Release of Funds</h3>

If a taxpayer decides not to move forward with an exchange, they must acknowledge to their QI that they understand they will pay all applicable taxes on the gain. Even so, exchange facilitators are only permitted to disburse funds at particular times for particular reasons. The only time someone can terminate an exchange early is at the end of the 45-day identification period. If the taxpayer has not identified a single property by 45 days, they can close their exchange, and the funds can be disbursed. If the taxpayer has identified any property, funds must be held until the transaction is complete or at the end of the 180-day exchange period. Suppose an exchange facilitator is found to be deviating from the rules. In that case, failure to comply with regulation could jeopardize any of this taxpayer's previous exchanges and any other exchanges facilitated by the company.

<h3>1031 Exchange Timeline</h3>

"Can I start a 1031 exchange after I've sold my property?” or "I just closed on my property; can I still do an exchange?" There are a few variations to this question, but ultimately the answer is always the same. Once you've sold and closed on a property, it is no longer eligible for exchange. The taxpayer cannot take actual possession or control the net proceeds from the sale of a relinquished property in a 1031 exchange. An exchanger must contact a QI before selling their property. If you find yourself short on time or at the closing table, don't lose hope with processing an exchange. With Accruit's patented software, Exchange Manager Pro℠, we can get you set up for a rush exchange in under an hour.

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Title:

Receipt of Funds in a 1031 Exchange

08/19/21

1031 Exchanges are a time-proven tax strategy that encourages the continuity of business investment. The benefits of 1031 like-kind exchanges are in ...

1031 Exchange Timeline Overview and Considerations

1031 exchange

08/19/21

IRC Section 1031 has been around for more than 100 years. Although the overall concept and purpose of like-kind exchanges have largely ...

Body:

IRC Section 1031 has been around for more than 100 years. Although the overall concept and purpose of <a href="https://www.accruit.com/blog/understanding-like-kind-requirement-1031-e…; target="_blank" title="1031 like-kind exchanges">1031 like-kind exchanges</a> have largely remained the same, the regulations and sequence of events an exchange must comply with have evolved. Legislation has sought to address and prevent potential wrongdoings or misinterpretation, as was done in the landmark legal ruling in the Starker vs US case. To fully benefit from the tax deferral, the requirements to exchange are as follows:

<ul>
<li>An exchange must be facilitated through a Qualified Intermediary (QI)</li>
<li>Property must be held for investment or business purposes</li>
<li>There must be no constructive or actual receipt of exchange funds</li>
<li>Taxpayer must adhere to the time limits set out in the tax code</li>
<li>Property must be "like-kind"</li>
<li>The property exchanged into must be equal or up in value</li>
</ul>

The requirement that investors tend to feel is the most restrictive once they deem their property eligible for exchange is the strict timeline they must follow.

<h2>Forward Exchange</h2>

In a typical forward exchange, the taxpayer will hire a Qualified Intermediary (QI) to help transact their exchange. The taxpayer will list their property, and once it sells, the QI will hold the proceeds from the sale of the relinquished property for later use in purchasing the identified replacement property(s). Once the relinquished property sells, the taxpayer has 45 days to identify replacement property(s) and 135 days after that to finalize their exchange for a total of 180 days.

<h2>Reverse Exchange</h2>

The Internal Revenue Service (IRS) does not allow a taxpayer to hold the replacement property and the relinquished property simultaneously. This restriction can present challenges to investors who would like to purchase their replacement property before selling their relinquished property when a reverse exchange is required. The timeline of a <a href="https://www.accruit.com/blog/infographic-10-steps-reverse-exchange" target="_blank" title="reverse 1031 exchange">reverse 1031 exchange</a>, sometimes called a <a href="https://www.accruit.com/blog/reverse-and-improvement-1031-exchanges-hot…; target="_blank" title="parking exchange">parking exchange</a>, is the same as a <a href="https://www.accruit.com/blog/1031-exchange-explained-top-25-faqs-answer…; target="_blank" title="forward exchange">forward exchange</a>. The main difference is that instead of the QI holding funds, they hold a property. After hiring the qualified intermediary, the taxpayer and QI will open an LLC that will act as the Exchange Accommodation Titleholder (EAT), which will hold the replacement property as the taxpayer sells the relinquished property. Once the EAT has taken the title of the new property, the exchanger has 45 days to identify the property they will be selling. After the initial 45 days, the taxpayer has the remaining 135 days of the total 180 to sell the property they identified and finalize the exchange.

<h2>Build-to-Suit or Improvement Exchange</h2>

There are times when a taxpayer would like to sell a property and exchange it for a property they would like to develop or improve. Build-to-suit exchanges refer to exchanges in which improvements are made on the property acquired. In a build-to-suit or improvement exchange, the taxpayer can sell their property to purchase and improve a new property or purchase the replacement property first and then use the funds from the sale of the relinquished property to pay back loans used to fund the initial purchase and improvements. In both cases, the taxpayer has 180 days to use the balance of funds to improve the property. Any funds that have not been used during the parking period are considered real estate “boot” and are subject to capital gain tax. The 180-day time limit begins when the EAT, set up with the QI before the exchange, assumes title of the property.

<h2>1031 Exchange Timeline Considerations</h2>

Following the timeline on a 1031 exchange is not always as easy as it sounds. A taxpayer may not be able to identify a suitable property to buy in the 45-day identification period. A taxpayer may not be able to sell their property within 180 days. Improvements on a property may take longer than 180 days. Once a safe harbor provision is not met, the exchange is no longer eligible for tax deferment.  
Here are a few ways of setting yourself up for a successful exchange:

<ol>
<li>If you want to begin a forward exchange, start looking for your replacement property as early as possible</li>
<li>You can stretch out this extra period by delaying the close date on your relinquished property, preventing your 45-day countdown from starting</li>
<li>If you have already identified a property you would like to purchase but have not been able to sell your current property, consider a reverse exchange. That way, you will ensure your purchase and have 180 days to sell the old property</li>
<li>To avoid unwanted delays that may cut your <a href="/blog/1031-exchange-explained-time-limits" target="_blank" title="1031 exchange timeline">1031 exchange timeline</a> short, ensure that your financing is in order before entering into an exchange agreement</li>
</ol>

Metatags:

Title:

1031 Exchange Timeline Overview and Considerations

1031 exchange

08/19/21

IRC Section 1031 has been around for more than 100 years. Although the overall concept and purpose of like-kind exchanges have largely ...

1031 Exchange Timeline and Identification Requirements

1031 exchange

08/06/21

An experienced Qualified Intermediary is accustomed to dealing with all types of complex exchanges and makes sure that the complexity ...

Body:

Since 1921, the rules for qualifying and completing <a href="https://www.accruit.com/property-owners/1031-exchange-explained" title="1031 exchanges">1031 exchanges</a> have gradually broadened and become less restrictive. Even so, there are dos, don’ts, and several gray areas of which taxpayers should be aware. As an experienced Qualified Intermediary, Accruit is accustomed to dealing with all types of complex exchanges and wants to make sure that the complexity of exchange does not deter property owners from considering one.  <a href="https://info.accruit.com/start-an-exchange" title="Start an Exchange with Accruit">Accruit</a> can help you put the pieces together for a successful 1031 exchange.

For the taxable gain to be deferred, specific vital requirements must be satisfied:

<ul>
<li>Properties must be exchanged, rather than sold and then purchased</li>
<li>There must be no constructive or actual receipt of proceeds received by the taxpayer from the transfer of the relinquished property pursuant to the relinquished property contract</li>
<li>Properties must be “Like-Kind” </li>
<li>Properties must be held for business or investment purposes</li>
<li>Exchange must be equal or up in value</li>
<li>The exchange must follow time limit and identification requirements:  A taxpayer must acquire or identify the target replacement property within 45 days after the transfer of the relinquished property. Properties received (purchased) within the 45-day designation period are deemed to be identified. The replacement property must be designated in a written document, unambiguously described, signed by the taxpayer, and received by the qualified intermediary on or before the 45th day. If the taxpayer identifies replacement property within the designated period, the exchange period end date may be extended up to 180 days from the transfer of the first relinquished property. This provides the taxpayer with additional time to complete the exchange. However, it might be necessary for the taxpayer to file a tax-filing extension to utilize the full 180 days.</li>
</ul>

<h2>Property Identification</h2>

In a typical forward exchange, the taxpayer will hire a <a href="https://www.accruit.com/qi-services" title="1031 Exchange Qualified Intermediary">1031 exchange qualified intermediary</a> (QI) to help transact their exchange. The QI will hold the proceeds from the sale of the relinquished property to use later to purchase the identified replacement properties. Once the relinquished property is sold, the taxpayer has 45 days to identify replacement properties and 135 days after that to finalize their exchange for a total of 180 days. The property requirements can be found in more detail in “1031 Exchange Explained: Equal or up in Value”. Here’s an example to better explain the timing regulations.

“Mr. Clark wants to sell his farmland and exchange it for a less laborious property. Before he lists his property, Mr. Clark reaches out to the QI he would like to work with and begins the necessary documentation for his exchange, then listing his farm for sale. Mr. Clark can look for replacement properties while his farm is on the market, but his identification period officially begins the day his farmland sells.

During his 45-day identification period, Mr. Clark identifies a small commercial office building he would like to acquire. One of the critical conditions when identifying property is the specific description when relaying the information to your QI. It would not suffice if Mr. Clark were to contact his QI and describe the property he would like to acquire as “an office building near the business district.” Mr. Clark must unambiguously identify his property, with an address, as “100 Main St. Denver, CO.””

There are two rules to follow when describing specified property:

<ul>
<li>Replacement property is identified only if it is unambiguously described in the written document or agreement</li>
<li>Real property is generally unambiguously described if it is characterized by a legal description, street address, or distinguishable name (e.g., the Mayfair Apartment Building)</li>
</ul>

Keep in mind that once a property is identified within the 45-day period, the only way to end the exchange early is if there occurs a material and substantial contingency that relates to the exchange is provided for in writing is beyond the taxpayer’s control or any other disqualified person. Otherwise, the funds must remain in the exchange account for the entire 180-day exchange period. For example:

“Mr. Clark identifies the property he wants to acquire early on in the 45 days. Once he gives written and unambiguous notice, the funds received from the sale of his old property must remain with the QI until the identified property is purchased or 180 days whichever is earlier.”

Metatags:

Title:

1031 Exchange Timeline and Identification Requirements

1031 exchange

08/06/21

An experienced Qualified Intermediary is accustomed to dealing with all types of complex exchanges and makes sure that the complexity ...

Exchanging Equal or up in Value

1031 exchange

07/22/21

Since 1921, the rules for qualifying and completing 1031 exchanges have gradually broadened and become less restrictive. Even so, there are do's ...

Body:

Since 1921, the rules for qualifying and completing <a href="https://www.accruit.com/property-owners/1031-exchange-explained" title="1031 exchanges">1031 exchanges</a> have gradually broadened and become less restrictive. Even so, there are do's and don’ts and several gray areas of which taxpayers should be aware. Here at Accruit, we are accustomed to dealing with all types of complex exchanges, and we want to make sure that the complexity of exchange doesn't deter you from considering one. We'll help you put the pieces together for a successful exchange. For the taxable gain to be deferred, specific key requirements must be satisfied:

<ul>
<li>Properties Must Be Exchanged, Rather than Sold and then Purchased</li>
<li>There Must Be No Constructive or Actual Receipt of Exchange Funds</li>
<li>Properties Must be <a href="https://www.accruit.com/blog/1031-real-estate-exchanges-what-like-kind&…; title="like kind exchange">"Like-Kind" </a></li>
<li>Must Follow Exchange Time Limit & Identification Requirement</li>
<li>Properties Must Be Held for Business or Investment Purposes</li>
<li>Exchange Must Be Equal or Up in Value:
<ul>
<li>To potentially defer all of the taxable gain, a property owner must first reinvest all of the equity in the relinquished property into the replacement property. Second, the purchase price of the property acquired must equal or exceed the sale price of the relinquished property.  Typically, this requires debt on the new property to equal or exceed the debt that is paid off on the relinquished property.</li>
</ul>
</li>
</ul>

<h2>Identification Rules: The 3-Property Rule</h2>

The 3-property rule states that the replacement property identification can be made for up to three properties, meaning that an exchanger may identify more than one alternate property to be received in an exchange. The taxpayer can identify and purchase up to three replacement properties after relinquishing their initial property to the qualified intermediary, like Accruit. The amount totaled at the end of the identification is not relevant to the requirements of <a href="https://www.accruit.com/blog/tax-code-sections-1031-and-1033-whats-diff…; title="section 1031 like-kind exchange">section 1031</a>, as long as it is not more than three properties. A majority of taxpayers will utilize this rule. Here is an example of the utilization of the 3-property rule: Ms. Garcia begins a 1031 exchange in Minnesota with Accruit, with a lot valued at $325,000. Before identifying her new replacement properties, Ms. Garcia confirmed to Accruit that she has identified three potential properties and intends to acquire only one. Within 45 days Ms. Garcia unambiguously identifies three new properties valued at $325,000, $350,000, and $370,000, respectively. As long as Ms. Garcia receives one of these properties within the replacement period, she has satisfied the 3-property rule.

<h2>Identification Rules: The 200% Rule</h2>

The 200% rule states that the taxpayer may identify:

“Any number of properties as long as their aggregate fair market value as of the end of the identification period does not exceed 200 percent of the aggregate fair market value of all the relinquished properties as of the date the relinquished properties were transferred by the taxpayer.”

Another way to state this is that the taxpayer can identify any number of properties and close on any number of them if the sum of the market value of all of them does not exceed twice the market value of the relinquished property.  There is some uncertainty of how the market value of these properties is determined. The listing price? The amount the seller is willing to accept?  The amount that the taxpayer agrees to pay?  The answer is unclear, but using the listing price would surely be a safe choice. Here is an example of the 200% percent rule: Ms. Garcia is exchanging her lot valued at $300,000. She identifies four new properties, each priced at 100,000. Although Ms. Garcia identified more than three properties, their combined value does not equal more than 200% of the value of her relinquished property. Therefore, it has satisfied the identification rules.

<h2>Identification Rules: The 95% Rule</h2>

The 95-percent rule is defined as follows:

"Any replacement property identified before the end of the identification period and received before the end of the exchange period, but only if the taxpayer receives before the end of the exchange period identified replacement property the fair market value of which is at least 95 percent of the aggregate fair market value of all identified replacement properties."

As a practical matter, this rule is difficult to adhere to. It provides that should the taxpayer have overidentified for the first two rules, the identification can still be considered valid if the taxpayer receives at least 95% in value of what was identified. For example, suppose a taxpayer identified four properties or more whose market value exceeds 200% of the relinquished property value, to the extent that the taxpayer received 95% of what was identified the identification is deemed proper. In the real world, it is difficult to imagine this rule being relied upon by a taxpayer. Let's use Ms. Garcia as an example again, she is exchanging her $300,000 lot in Minnesota, and she overidentifies a total of 21 lots, each priced at $35,000. Ms. Garcia identified more than three properties and exceeded 200% of the value of her relinquished property. However, she can still keep her exchange valid if she purchases at least 95% of the value of those 21 lots she identified. If Ms. Garcia instructs her intermediary to convey at least 20 of those lots during the replacement period, she has satisfied the identification rules because she is purchasing at least 95% of the $735,000 she identified, and her exchange is still valid.

<h2>Conclusion </h2>

The relinquishment and replacement of properties are vital components of 1031 exchanges. Navigating the regulations in a 1031 exchange can seem daunting, and there are many questions throughout the process. Can you buy two properties in a 1031 exchange? What are the <a href="https://www.accruit.com/blog/1031-like-kind-exchange-pitfalls-avoid" title="1031 exchange rules">1031 exchange rules</a> in Florida or Kentucky? It is strongly recommended that you discuss your exchange with your tax and legal advisors along with a qualified intermediary. Accruit's leadership team has over 200 years of combined experience working with taxpayers and their advisors in structuring successful 1031 exchanges.

At <a href="https://www.accruit.com/contact-us" title="Start an Exchange with Accruit">Accruit</a>, we handle all types of complex exchanges. Have a situation you'd like to speak to an expert about? No problem. We're happy to have a free, no-obligation consultation with you.

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Title:

Exchanging Equal or up in Value

1031 exchange

07/22/21

Since 1921, the rules for qualifying and completing 1031 exchanges have gradually broadened and become less restrictive. Even so, there are do's ...

1031 EXCHANGE GENERAL

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