<h2>The Facts</h2>

<p>A qualified intermediary (QI) company, Accruit, received an inquiry from some taxpayers, who we will call Mr. and Mrs. Pike, regarding facilitating a real estate exchange.&nbsp; The clients got in touch with Accruit on July 14, 2014.</p>

<p>The Pikes had entered into a contract to sell their ½ interest in a multi-family investment property located in San Francisco, California.&nbsp; The contract called for a closing on August 15, 2014.&nbsp; The sale price was $1,000,000.&nbsp; At this point in time, the Pikes did not know what they might be acquiring as replacement property.&nbsp;</p>

<h2>The Problem</h2>

<p>They did not want to incur any tax in connection with the sale.&nbsp; Although QIs cannot give tax advice, and we did not, let’s assume their basis in the property being sold, the relinquished property, was $600,000 and their joint income was above $250,000 per year.&nbsp; The basis in property is determined by the original purchase price of the property plus the cost of any improvements they added to the property and minus any depreciation they took on the property during their period of ownership.&nbsp; Let’s assume they bought the property for $700,000, added $50,000 in improvements and took $150,000 in depreciation to arrive at the basis in the property.&nbsp; Without an exchange they would be looking at taxes as follows:</p>

<ul>
<li>20% capital gain on the appreciation ($250,000 x 20%)<img alt="Forward exchange of real estate" src="/sites/default/files/files/forward-exchange-example.jpg" style="width:83px; height:108px; float:right" /></li>
<li>25% recapture of depreciation taken ($150,000 x 25%)</li>
<li>Affordable Care Act tax ($250,000 x 3.8%)</li>
<li>Approximate effective rate of California capital gain ($250,000 x 9%)</li>
</ul>

<h2>The Solution: A 1031 Exchange</h2>

<p>A tax deferred exchange, in which the Pikes would trade up or even in value and have at least the same new mortgage liability as they had on the relinquished property, would negate the payment of any tax.&nbsp; The applicable forward exchange docs were prepared for the Pikes.&nbsp; They executed and returned these documents consisting of the following:</p>

<ul>
<li>Exchanger information form</li>
<li>Tax deferred exchange agreement</li>
<li>Qualified escrow agreement for the deposit and holding of the exchange funds</li>
<li>Assignment of rights in the relinquished property contract</li>
<li>Copy of the sale contract pertaining to the assignment</li>
<li>W-9 in connection with the interest to be earned on the deposit of the exchange funds</li>
<li>Copies of their drivers’ licenses</li>
</ul>

<p>For a non-1031 exchange transaction in California, the settlement agent may have to hold back some of the sale proceeds to cover the state’s capital gains liability.&nbsp; However when California taxpayers are selling relinquished property as the first step towards an exchange of property, the client will complete a form 593-C known as a “Real Estate Withholding Certificate” in order to obtain an exemption from the withholding.&nbsp; The QI is then responsible for withholding should the taxpayer not utilize all the funds in the exchange account when they acquire their replacement property.</p>

<p>The Pikes closed on the sale of their property on July 31, 2014, and the amount of $821,377 was wire transferred to their exchange account.&nbsp; Once the relinquished property sale was complete they needed to provide the following forms in order to complete their acquisition of the replacement property:</p>

<ul>
<li>Designation notice within 45 days of the sale identifying up to three potential replacement properties (<a href="/blog/1031-exchange-identification-replacement-rules">read more about the requirements for identifying replacement property</a>)</li>
<li>Assignment of rights in the replacement property contract</li>
<li>Copy of the purchase contract pertaining to the assignment</li>
<li>Disbursement instructions to the QI and the escrow agent for the replacement property purchase</li>
</ul>

<p>On August 26, 2014, the Pikes signed and returned the designation notice identifying a property in San Mateo, California as their only replacement property.&nbsp; On September 3, 2014, they assigned their rights under the replacement property contract and directed the QI to put down earnest money of $23,250 in connection with the purchase of the new property.&nbsp; On September 11, 2014, the QI was directed to wire transfer the additional sum of $776,414 to the settlement agent and the Pikes acquired the property at that time.</p>

<p>The client’s exchange account held an additional $21,176 of non-reinvested proceeds and the Pikes sought a return of that sum.&nbsp; Due to California’s withholding requirement, North Star completed a California Real Estate Withholding Tax Statement (Form 593) requiring a hold back and direct payment to the State of 3.33%, or $723. North Star remitted the balance to the Pikes.</p>

<p>The Pike’s will file an IRS form 8824 at the end of the tax year to report their exchange transaction.</p>

<h2>The Result</h2>

<p>With the exception of the small amount of tax pertaining to the funds not needed in the acquisition of the replacement property, the Pikes achieved tax deferral on the sale of their relinquished property&nbsp; - approximately a $112,000 savings which was reinvested in their replacement property.&nbsp;</p>

<p>Download the <a href="https://info.accruit.com/forward-exchange-whitepaper">1031 Forward Exchange Procedural Outline</a> of the step-by-step processes involved in completing a tax deferred exchange, which you may review with your tax advisor.</p>

<p>&nbsp;</p>

<p><em>Updated 2/24/2022.</em></p>

<p>Understanding the&nbsp;rules for identification in regards to a 1031 Exchange are essential for ensuring you&nbsp;are on track for a valid 1031 Exchange. The rules were established as part of the Tax Reform Act of 1984 and have remained unchanged to date. Let's review the article below which covers the specific rules for identification, as well as receipt of replacement property.</p>

<h2>Why is it Necessary to Identify Replacement Property?</h2>

<p>In a typical Internal Revenue Code (IRC) §1031 delayed exchange, commonly known as a <a href="/services/1031-exchange">1031 exchange</a> or tax deferred exchange, a taxpayer has 45 days from the date of sale of the relinquished property to identify potential replacement property.&nbsp; This 45-day window is known as the identification period.&nbsp; The taxpayer has 180 days (shorter in some circumstances) to acquire one or more of the identified properties, which is known as the exchange period. Property(ies) actually acquired within the 45-day identification period do not have to be specifically identified, however they do count toward the 3-property and 200 percent rules discussed below.</p>

<p>These rules are a direct result of the Starker case where for the first time a taxpayer was found to be able to sell relinquished property on one day and acquire replacement property at a different point in time.&nbsp; In fact, the Starker case involved a five-year gap between the sale and purchase.&nbsp; Prior to the decision in the Starker case, it was believed that an exchange had to be simultaneous.&nbsp; As a result of the open-endedness of this decision, as part of the Tax Reform Act of 1984, Congress added the 45/180 day limitation to the delayed exchange.&nbsp; These time limitations were a compromise between allowing an exchange to be non-simultaneous while at the same time having some temporal continuity between the sale and the purchase.</p>

<h2>What are the Identification and Receipt Rules?</h2>

<p>The identification rules in a 1031 exchange include the following:</p>

<ul>
<li>The 45-day requirement to designate replacement property</li>
<li>The 3-property rule</li>
<li>The 200-percent rule</li>
<li>The 95-percent rule</li>
<li>The incidental property rule</li>
<li>Description of Replacement Property</li>
<li>Property to be produced</li>
</ul>

<h2><strong>The 45-day Identification Rule</strong></h2>

<p>The exchange regulations provide “The identification period begins on the date the taxpayer transfers the relinquished property and ends at midnight on the 45th day thereafter.”&nbsp; The identification must (i) appear in a written document, (ii) signed by the taxpayer and (iii) be delivered to the replacement property seller or any other person that is not a disqualified person who is involved in the exchange.&nbsp; The custom and practice is for the identification to be delivered to the qualified intermediary, however a written statement in a contract to purchase the replacement property stating that the buyer is identifying the subject property as his replacement would meet the requirements of the identification.&nbsp; The restriction against providing the notice to a disqualified person is that such a person may be likely to bend the rules a bit based upon the person’s close relation to the taxpayer.&nbsp; Disqualified persons generally are those who have an agency relationship with the taxpayer.&nbsp; They include the taxpayer’s employee, attorney, accountant, investment banker and real estate agent if any of those parties provided services during the two-year period prior to the transfer of the relinquished property.&nbsp; Property identifications made within the 45-day period can be revoked and replaced with new identifications, but only if done so within that the identification period.</p>

<h2><strong>The 3-Property Rule</strong></h2>

<p>This rule simply states that the replacement property identification can be made for up to “three properties without regard to the fair market values of the properties.”&nbsp; At one time in the history of §1031 exchanges, there was a requirement to prioritize identified properties.&nbsp; At those times, if a taxpayer wished to acquire a second identified property, they could not do so unless the first identified property fell through due to circumstances beyond the taxpayer’s control.&nbsp;&nbsp; Presumably this harsh requirement played a role in the 1991 Treasury Regulations where the 3-Property Rule is found.&nbsp; By far and away, most taxpayers utilize this rule.</p>

<h2><strong>The 200% Percent Rule</strong></h2>

<p>The 200-percent rule states the taxpayer may identify:&nbsp;</p>

<blockquote>
<p>“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.”&nbsp;</p>
</blockquote>

<p>Another way to state this is that the taxpayer can identify any number of properties and actually 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.&nbsp; There is some uncertainty of how the market value of these properties is determined.&nbsp; The listing price? The amount the seller is willing to accept?&nbsp; The amount that the taxpayer agrees to pay?&nbsp; The answer is unclear but using the listing price would surely be a safe choice.</p>

<h2><strong>The 95% Rule</strong></h2>

<p>The 95-percent rule is defined as follows:&nbsp;</p>

<blockquote>
<p>“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."</p>
</blockquote>

<p>As a practical matter, this rule is very hard to adhere to.&nbsp; Basically, it provides that should the taxpayer have over identified for purpose of the first two rules, the identification can still be considered valid if the taxpayer receives at least 95% in value of what was identified.&nbsp; For example, if a taxpayer identified four properties or more whose market value exceeds 200% of the value of the relinquished property, to the extent that the taxpayer received 95% of what was “over” identified then the identification is deemed proper.&nbsp; In the real world it is difficult to imagine this rule being relied upon by a taxpayer.</p>

<h2><strong>The Incidental Property Rule in Section 1031</strong></h2>

<p>The incidental property rule is defined as follows:&nbsp;</p>

<blockquote>
<p>“Solely for purposes of applying this paragraph (c), property that is incidental to a larger item of property is not treated as property that is separate from the larger item of property. Property is incidental to a larger item of property if - (A) In standard commercial transactions, the property is typically transferred together with the larger item of property, and (B) The aggregate fair market value of all of the incidental property does not exceed 15 percent of the aggregate fair market value of the larger item of property.”&nbsp;</p>
</blockquote>

<p style="text-align:center"><img alt="Incidental Property" height="526" src="/sites/default/files/files/incideental-property.jpg" width="800" /></p>

<p>In other words, if there is some incidental property that typically passes to a buyer in standard commercial transactions for this kind of property sale, to the extent that the value of any such property is less than 15%&nbsp; of the primary property, the incidental property does not have to be separately identified.</p>

<p>To illustrate this rule the exchange regulations use the example of an apartment building to be acquired for $1,000,000 which includes furniture, laundry machines and other miscellaneous items of personal property whose aggregate value does not exceed $150,000.&nbsp; In this example, those various items of personal property are not required to be separately identified nor does that property count against the 3-Property Rule.&nbsp; Be aware however that this rule only applies to identification and not to making sure that replacement property must still be like-kind to the relinquished property.&nbsp; For example, if the relinquished property was real estate with a value of $1,000,000 and the replacement property was real estate with a value of $850,000 plus incidental property of $150,000, the taxpayer will still have tax to pay (known as “ boot”) because the incidental personal property was not like-kind to the relinquished property.</p>

<h2><strong>Description of Replacement Property in IRS 1031 Exchange</strong></h2>

<p>The description of replacement property must be unambiguous and specific.&nbsp; For instance, the identification of “a condominium unit at 123 Main Street, Chicago, IL” would fail due to the specific unit not having been identified.&nbsp; The actual rules are as follows:</p>

<ul>
<li>Replacement property is identified only if it is unambiguously described in the written document or agreement.</li>
<li>Real property generally is unambiguously described if it is described by a legal description, street address, or distinguishable name (e.g., the Mayfair Apartment Building).</li>
<li>Personal property generally is unambiguously described if it is described by a specific description of the particular type of property. For example, a truck generally is unambiguously described if it is described by a specific make and model.</li>
</ul>

<h2><strong>1031 Exchange Property to Be Improved or Produced</strong></h2>

<p>Oftentimes, the property intended to be acquired by the taxpayer will be in a different physical state at the time it is identified than it will be upon receipt by the taxpayer.&nbsp; The regulations account for this by requiring the identification for real estate to include the address or legal description of the property plus&nbsp;as much detail as practical about the intended improvements.&nbsp; In connection with the receipt of property to be improved, even if the described improvements are not completed at the time it is received by&nbsp;the taxpayer,&nbsp;the exchange is valid so long as the actual property received does not differ from&nbsp;what was identified by the taxpayer&nbsp;except for the degree of improvements that have been completed. Personal property is a bit different in this regard and the “production” (improvements) needs to be completed within the 180-day term.</p>

<h2>Summary</h2>

<p>The ability to defer taxes through a §1031 exchange is a very valuable benefit to taxpayers.&nbsp; However, to receive this benefit, all the exchange rules must be strictly adhered to.&nbsp; The rules pertaining to identification and receipt of replacement property must be understood and met in order to comply with the technical requirements of this IRC section.&nbsp; In fact, the property identification rules are so germane to a proper exchange that there is a question asked of the taxpayer on the exchange reporting form 8824 about compliance with these rules.</p>

<p>&nbsp;</p>
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<p><em>Updated 2/23/2022.</em></p>

<p>DENVER, CO, February 15, 2022 – Exchange Authority, a subsidiary of Fidelity Bank in Leominster, MA, became the first Qualified Intermediary (QI) to implement Exchange Manager Pro^SM to facilitate their 1031 exchange business. Exchange Manager Pro^SM, a patented SaaS offering, hosted on Microsoft Azure, provides 24/7 secure, online access to all 1031 exchange data, documents, and reports. It allows for single-entry data to auto-generate required exchange agreements, assignments, and notifications.</p>

<p>Exchange Authority’s President and CEO, John Peculis, confirmed that Exchange Manager Pro^SM has offered his team a one-stop-shop for 1031 exchanges, from document creation, automated communication, calendar reminders, and status tracking throughout the entire exchange process. “Exchange Manager Pro^SM is a solution made for QIs, by a QI that truly understands the technical side of 1031 Exchanges and therefore provides a true solution,” stated John.</p>

<p>Exchange Authority is seeing a significant reduction in the calls and emails their specialists must manage daily due to Exchange Manager Pro^SM providing their team a real-time dashboard of the exchange status and automated updates to the client. “After internal analysis, we expect to decrease the time spent on tedious, back-and-forth communication by 30-50% with Exchange Manager Pro^SM,” adds John.</p>

<p>“Exchange Manager Pro^SM is an out-of-the-box solution for all Qualified Intermediaries that are looking to increase efficiencies, security, and volume, without increasing staff,” said Brent Abrahm, Accruit’s President and CEO. “We are excited about the impact this technology is having on the entire real estate industry.&nbsp; Automating routine, repetitive processes through Exchange Manager Pro^SM is allowing QIs to focus on creating a much greater customer experience.”&nbsp;</p>

<p>&nbsp;</p>

<p><b>About Exchange Manager Pro^SM</b></p>

<p>Exchange Manager Pro^SM by Accruit is a proprietary, online software application that makes administering 1031 exchanges safe, secure, and simple. Exchange Manager Pro^SM was designed to ease the administrative burdens related to like-kind exchanges and automate routine functions of Qualified Intermediaries including: online client onboarding, document creation and distribution, and automatic deadline reminders and notifications.</p>

<p><b>About Exchange Authority</b></p>

<p>Exchange Authority has been assisting clients and their professional advisors throughout the United States on exchange matters and acting as a Qualified Intermediary since Congress adopted the exchange safe harbor regulations in 1991. As a Qualified Intermediary,&nbsp; Exchange Authority advises and educates their clients on the process, creates all required documents, coordinates the exchange of funds, and provides full reports at the end of the exchange. In 2008, Exchange Authority was acquired by Fidelity Cooperative Bank, making it a wholly-owned subsidiary of the bank. Learn more about <a aria-label="Exchange Authority" href="https://exchangeauthority.com&quot; title="Exchange Authority">Exchange Authority</a>.</p>

<p>While Reverse Exchanges have been safe-guarded since 2000 there is still much confusion in the marketplace&nbsp;as to whether or not they are approved by the IRS. Let's revisit the article below in which we cover frequently asked questions about Reverse Exchanges and discuss the history and evolution of them.&nbsp;&nbsp;</p>

<p>Real estate owners often receive conflicting advice about whether reverse tax deferred exchanges are legitimate tax strategies pre-approved as to structure by the IRS.&nbsp; In fact, reverse tax deferred exchanges have a long history and continue to be a valuable tool for owners of real estate who hold property for investment or business purposes. Here are some of the questions that frequently come up and speak to the evolution of how reverse exchanges of real estate came to be approved. We'll close this post with a look at the two approved structures in place today.</p>

<h2>What is a 1031 Reverse Exchange?</h2>

<p>A reverse exchange refers to the sequence of a taxpayer’s sale of relinquished property and the purchase of replacement property.&nbsp; When circumstances require a taxpayer to acquire replacement property prior to the sale of relinquished property, that situation is known generally as a “reverse exchange” fact pattern.&nbsp; Without further planning, the taxpayer’s direct purchase of the replacement property prior to the sale of the relinquished property, sometimes referred to as a “pure reverse” exchange is not approved by the IRS.&nbsp; The ability to do a reverse exchange requires a taxpayer to structure the transaction in a manner providing for the taxpayer to sell the relinquished property before acquiring the replacement property.&nbsp; In fact, the use of the term “reverse exchange” is a bit of a misnomer since the solution to deal with a reverse exchange fact pattern requires the sequence of sale and purchase to be accomplished with non-reverse timing.&nbsp; There are a couple of ways that this can be accomplished.</p>

<h2>Do the Internal Revenue Service Regulations: IRC§1031 Allow for Reverse Exchanges?</h2>

<p>Not specifically. After the landmark legal decision in the Starker case&nbsp;and the <a href="/exchange-library/internal-revenue-service-regulations-irc-%C2%A71031">1991 Treasury Regulations</a> that followed, exchanges became a lot easier to complete and therefore much more popular than before.&nbsp; For the same reasons, the desire for taxpayers to complete reverse exchanges became much more popular at the same time.&nbsp; In fact, during the comment period between May of 1990 and April of 1991 regarding the proposed regulations governing conventional forward exchanges (see <a href="/exchange-library/internal-revenue-service-regulations-irc-%C2%A71031">Internal Revenue Service Regulations: IRC§1031</a>), many persons requested the IRS to include guidelines for completing a reverse exchange at the same time.&nbsp; In the preamble to those final regulations, however, the Treasury Department declined to do so stating:&nbsp;</p>

<blockquote>
<p>“After reviewing the comments and the applicable law, the Service has determined that the deferred exchange rules of Section 1031(a)(3) do not apply to reverse-Starker transactions… however the Service will continue to study the applicability of the general rule of 1031(a)(1) to these transactions.”</p>
</blockquote>

<h2>Does the IRS Revenue Procedure 2000-37 Allow for Reverse Exchanges?</h2>

<p>Yes. During the period from 1991 through 2000, many professional advisors structured reverse exchanges without the benefit of a “safe harbor” set forth by the IRS.&nbsp; Fortunately, this uncertainty became clarified in September of 2000 with the issuance of <a href="/exchange-library/rev-proc-2000-37-reverse-exchanges">Revenue Procedure 2000-37</a> (Rev. Proc.).&nbsp; Basically, the Rev. Proc. suggested that an accommodating party could acquire the replacement property on behalf of the taxpayer and hold it for up to 180 days (shorter in some cases) allowing the taxpayer time to sell the relinquished property and immediately acquire the replacement property from the accommodating party.&nbsp; Alternatively, the taxpayer could arrange for an accommodating party to acquire the relinquished property from the taxpayer, allowing the taxpayer to immediately acquire the replacement property...provided however, that the taxpayer found a bona fide buyer to acquire the property from the accommodator within 180 days (shorter in some cases).&nbsp; Either of these steps would allow the taxpayer to effectively acquire the new property prior to the sale of the old property through an IRS approved reverse exchange structure.&nbsp;</p>

<h2>What is an EAT in a Reverse Exchange?</h2>

<p>The Rev. Proc. referred to the accommodating party as an “Exchange Accommodation Titleholder”, which is currently often referred to as an “EAT”.&nbsp; There are many companies that provide conventional forward exchange services (as a qualified intermediary) and a more limited number of those companies are also set up to provide EAT services.&nbsp; The practice of holding title to a property on behalf of a taxpayer is often referred to as “parking” title to the property with the EAT.&nbsp; For the mutual benefit of the taxpayer and the EAT, it is customary for the EAT to take title to the property using a special purpose entity, usually a limited liability company (“LLC”).&nbsp; This insulates each separate client’s reverse exchange that is being facilitated by the EAT from other clients’ transactions and from the affairs of the exchange company acting as the member of the EAT.</p>

<h2>Today's IRS Approved Reverse Exchange Structures</h2>

<h3>1. Parking the Replacement Property</h3>

<p>The reverse exchange Rev. Proc. requires the taxpayer and EAT to enter into an overarching document referred to as a Qualified Exchange Accommodation Agreement (“QEAA”) describing the transaction, the relationship between the parties and reciting certain required terms.&nbsp;</p>

<ul>
<li>Usually the taxpayer will already be under contract with the buyer prior to contacting the EAT in regard to the reverse exchange.&nbsp; To shift the purchase over to the EAT, there is a simple assignment document assigning the purchase contract from the taxpayer to the EAT (Note that this assignment should not be confused with the assignment of rights to the Qualified Intermediary that takes place in a forward exchange.).</li>
<li>The property acquisition financing on behalf of the EAT is either provided by the taxpayer or the taxpayer’s relationship lender, or a combination of both.&nbsp; It is customary for the EAT to issue a Note and some kind of security interest such as a mortgage or a pledge of the membership interest in the limited liability company to the lender(s).&nbsp;</li>
<li>To avoid dealing with any property tenants, the EAT will typically enter into a Master Lease with the taxpayer so that the taxpayer can act as lessor in relation to the tenants.&nbsp; This also puts the rental income into the taxpayers hand and not in the hands of the EAT.&nbsp; The EAT simply wants to receive its fee.&nbsp; The Rev. Proc. does not require the lease or loan to be arm’s length.&nbsp;</li>
<li>In addition to the QEAA, the parties typically enter into some kind of contract providing for the transfer of the property, or the membership in the LLC, to the taxpayer.&nbsp; This takes place immediately after the taxpayer’s sale of the relinquished property.&nbsp;</li>
<li>Last, depending upon the type of property being parked, there is typically a Phase One environmental report or simply an environmental indemnification agreement between the parties.&nbsp;</li>
</ul>

<p>To recap, the applicable documents generally are as follows:</p>

<ul>
<li>Qualified Exchange Accommodation Agreement</li>
<li>Assignment of Purchase Contract</li>
<li>Non-Recourse Promissory Note</li>
<li>Mortgage, Deed of Trust or Pledge Agreement of Membership Interest</li>
<li>Master Lease</li>
<li>Limited Liability Company Sale Agreement</li>
<li>Environmental Indemnity Agreement</li>
</ul>

<p>Final Step:&nbsp; Entering into a reverse exchange with an EAT does not remove the necessity of doing a conventional forward exchange of the relinquished property for the replacement property.&nbsp; Rather, it buys the taxpayer time to sell the relinquished property by arranging for the EAT to acquire the replacement property from the seller and to park it. The proceeds from the sale of the relinquished property are used to acquire the property from the EAT and the EAT uses those funds to pay back any prior loans made to the EAT for the original acquisition of the replacement property.</p>

<p>A reverse exchange parking the replacement property combined with a forward exchange looks something like the following:</p>

<p><img alt="Parking Replacement Property Reverse Exchange" src="/sites/default/files/files/Real%20Estate%20Exchanges%20-%20Parking%20Replacement%20Property%201.jpg" style="height:511px; width:714px" /></p>

<h3>2. Parking the Relinquished Property</h3>

<p>Parking the relinquished property entails similar documentation to that of a replacement property parking arrangement.&nbsp; Conceptually, this arrangement is no different than a white knight showing up on the taxpayer’s doorstep to buy her property on the eve of the replacement property acquisition.&nbsp;</p>

<ul>
<li>Per the Rev. Proc. an overarching agreement must be entered into between the taxpayer and the EAT known as the QEAA.&nbsp;</li>
<li>There will be a contract between the taxpayer and the EAT providing for the EAT’s purchase of the relinquished property.&nbsp;</li>
<li>Generally if that property has debt on it, the EAT can acquire the property subject to the debt allowing for the property to be purchased for the amount of the taxpayer’s equity.&nbsp; That equity amount can be acquired through a bank loan or a direct loan from the taxpayer to the EAT.&nbsp; Any amount lent to the EAT will be used immediately by the EAT to acquire the property and the amount of equity paid goes into the taxpayer’s forward exchange account.&nbsp;</li>
<li>There is a Note and a security instrument reflecting the amount lent to the EAT.</li>
<li>A Master Lease allows for the taxpayer to deal directly with the tenants.&nbsp;</li>
<li>Depending upon the type of property, there may be a requirement for a Phase One Environmental Audit or an environment indemnity agreement.</li>
<li>Last, there may be some type of surety document which will provide for the taxpayer to be responsible for the representations and warranties made to the ultimate buyer of the relinquished property upon sale to that party by the EAT.&nbsp;&nbsp;</li>
<li>When the relinquished property is sold by the EAT to a permanent buyer, the funds received by the EAT are used to pay back any loans originally made to the EAT as well as any debt that the EAT acquired the property subject to.&nbsp;</li>
</ul>

<p>To park the relinquished property, the applicable documents generally are as follows:</p>

<ul>
<li>Qualified Exchange Accommodation Agreement</li>
<li>Agreement for the Purchase of the Relinquished Property</li>
<li>Non-Recourse Promissory Note</li>
<li>Mortgage, Deed of Trust or Pledge Agreement of Membership Interest</li>
<li>Master Lease</li>
<li>Environmental Indemnity Agreement</li>
<li>Surety Instrument</li>
</ul>

<p><strong>Final Step</strong>:&nbsp; Entering into a reverse exchange with an EAT does not remove the necessity of doing a conventional forward exchange of the relinquished property for the replacement property.&nbsp; Rather, it buys the taxpayer time to sell the relinquished property by transferring that property to the EAT, thereby triggering a sale of that property, allowing the taxpayer to acquire the replacement property on a non-reverse basis and taking up to six months (shorter in some cases) to find a permanent buyer.</p>

<p>A reverse exchange parking the relinquished property combined with a forward exchange looks something like the following:</p>

<p><img alt="Parking Relinquished Property in Reverse Exchange" src="/sites/default/files/files/Real%20Estate%20Exchanges%20-%20Parking%20Relinquished%20Property.JPG" style="height:496px; width:717px" /></p>

<h2>Determining which Property to Park</h2>

<p>When parking the replacement property the amount needed to acquire that property is a sum certain.&nbsp; However, when parking the relinquished property, it is often sold by the taxpayer to the EAT for a best guess of value.&nbsp; Inevitably, the actual amount later received by a permanent buyer will deviate up or down.&nbsp; So, when parking the relinquished property adjustments have to be made to deal with these deviations.&nbsp; So all things being equal, usually the replacement property gets parked.&nbsp; There are some factors which, when present, may suggest parking the relinquished property to be advantageous:</p>

<ul>
<li>The value of the relinquished property is much less than the replacement property so that the loan to the EAT is easy to attain</li>
<li>The replacement property may involve special financing such as a Tax Increment Financing (TIF) or a Small Business Administration (SBA) loan which requires the taxpayer to be the borrower</li>
<li>The replacement property may have some environmental issues which might involve some remediation of the issue</li>
</ul>

<p><em>Updated 2.15.2022.</em></p>

<p>In 2021, over 20% of commercial real estate&nbsp;participated in 1031 Exchanges and commercial property sales nearly doubled 2020's totals. Real estate investors aren't anticipating a slow down for 2022, this means another big year for 1031 exchanges. Given these projections, it is important to remember that choosing the right Qualified Intermediary to help you process your tax deferred exchange is crucial. Read through the tips below on choosing the right team to help you process your 1031 Exchange.&nbsp;</p>

<p>Choosing a Qualified Intermediary (QI) is an important decision, and as such, the process shouldn't be taken lightly. After all, your QI will be guiding you through a maze of federal and state requirements as well as safeguarding the proceeds from the sale of your relinquished property. Given the potential tax consequences involved with an improperly structured exchange and the safety issues related to your proceeds, a true due diligence approach should be taken before committing to a QI.<br />
<br />
To begin, let's take a quick look at some of the QI's responsibilities:</p>

<ul>
<li>Structuring the exchange</li>
<li>Preparing the related documentation</li>
<li>Safeguarding proceeds from the sale of the relinquished property(s)</li>
<li>Continuous monitoring and advising to ensure compliance with federal and state 1031 and QI requirements</li>
</ul>

<p>It's important to note that there is currently no federal regulation of qualified intermediaries. However, with the help of the Federation of Exchange Accommodators (FEA), a number of states have begun taking the lead in assuring higher professional standards for QIs. Some of the newly enacted requirements (which can vary from state to state) include:</p>

<ul>
<li>Qualified escrow and/or trust accounts for client funds</li>
<li>Minimum bond and insurance requirements</li>
<li>Fund withdrawal authorization requirements</li>
<li>Registration and licensing requirements for QIs</li>
<li>Investment limitations on exchange proceeds</li>
</ul>

<p>These are just some of the new state level regulatory requirements for QIs, and Accruit has taken a leadership role in making sure that legislators are fully informed in order to properly protect exchangers. However, our responsibility to inform doesn't stop there. It also includes educating the marketplace to ensure the right due diligence is performed prior to choosing a QI. Items we advise businesses to research include:</p>

<ul>
<li>The QI's technical expertise and experience</li>
<li>Banking processes and guidelines</li>
<li>Certified Exchange Specialist^® (CES^®) on staff</li>
<li>Quality control</li>
<li>Insurance and bonding coverage</li>
<li>Employee recruitment (including background checks with continuous monitoring)</li>
<li>Membership in the FEA</li>
<li>Applicability and QI's status related to relevant state regulatory requirements</li>
<li>References</li>
</ul>

<p>This article is merely intended to start a discussion regarding the importance of choosing the right QI. In practical terms, the process should be far more in-depth and you should include a trusted tax advisor as part of your decision team.</p>

<p>If you'd like more information on selecting a QI, <a href="/contact-us" target="_blank">please contact us</a>. We can help you understand the entire process and we're glad to connect you with helpful resources in the tax industry and at the FEA.</p>

<p>&nbsp;</p>

<p><em>Updated 2.08.2022.</em></p>

<p>It's been a number of years since we visited this article and while the core of 1031 exchanges have not changed, it is important to remember the foundation to ensure compliance. Two separate deadlines drive the 1031 exchange process and they are covered at length below. Another important concept discussed is how the 180-day exchange period which can be affected by the due date of the taxpayers return, so be sure to take special consideration of that&nbsp;as you read through the article below.&nbsp;</p>

<p>Despite working with <a href="/sites/default/files/FAQs.pdf" target="_blank">like-kind exchanges</a> (LKEs) for a number of years, we never tire of discussing the basics. That’s because, despite structural intricacies, LKEs are, at their core, deadline and document driven. It’s these basics that build a strong foundation for understanding LKEs as they increase in complexity. For this month’s LKE tip, let’s consider some basics and focus on exchange deadlines.</p>

<p>LKEs generally consist of two separate deadlines:</p>

<ul>
<li>The 45-Day Identification Deadline and</li>
<li>the 180-Day Completion Deadline.</li>
</ul>

<p>The 45-day window is frequently referred to as the “identification period,” while the 180-day window is often called the “exchange period.” Note that both deadlines are triggered on the same date and run concurrently.</p>

<p>In a standard Delayed Exchange (taxpayer sells first and buys at a later date), both deadlines are triggered on the date ownership of the relinquished property is transferred. Under the standard Reverse Exchange structure (buy first, sell later), both deadlines are triggered on the initial ownership transfer date of the replacement property. However, for both types, the counting of days doesn’t actually begin until the day after ownership transfer occurs.</p>

<p>In order to complete a valid 1031 exchange, the replacement property must be both:</p>

<ul>
<li>properly identified by midnight on day 45 and</li>
<li>received by midnight on day 180.</li>
</ul>

<p>A couple other things to note:</p>

<ul>
<li>Both the 45- and 180-day deadlines include all calendar days, including weekends and holidays.</li>
<li>The deadlines are absolute with extensions only allowed for:
<ul>
<li>Presidentially declared disasters</li>
<li>Terrorist or military actions</li>
<li>Taxpayers serving in combat zones</li>
</ul>
</li>
</ul>

<ul>
</ul>

<p>Furthermore, as we approach the end of the calendar tax year, it is vital to fully understand the 180-day deadline. The regulations clearly specify the exchange period as:</p>

<blockquote>
<p>“..the date the taxpayer transfers the relinquished property and ends at midnight on the earlier of the 180th day thereafter or the due date (including extensions) of the taxpayer’s return of the tax imposed by chapter 1 of subtitle A of the Code for the taxable year in which the transfer of the relinquished property occurs.”</p>
</blockquote>

<p>In short, if you are participating in a like-kind exchange, be sure to review the due date of your tax return and contemplate the need to apply for an extension of time to file. Otherwise, you might find yourself with an unexpectedly short exchange period.</p>

<p>&nbsp;</p>

<p><em>Updated 2.07.2022.</em></p>