TAX DEFERRED EXCHANGES OF REAL ESTATE

The procedures involved in qualifying a tax deferred exchange of a business or investment real estate for other real estate under Section 1031 of the Internal Revenue Code are highly technical and are absolute requirements which may not be varied. My services in a tax deferred exchange are to assist and guide the client through the process from the sale of the exchange property to the purchase of one or more replacement properties. However, be aware that a tax deferred exchange does not eliminate taxes, but in most instances only postpones them. The one common situation wherein taxes may be eliminated is where the replacement property is later converted to a personal residence for two out of five years. After the two year period a single taxpayer is allotted a $250,000 exemption and a married couple is allotted a $500,000 exemption on the profit of a sale.

The first issue is to determine what can be the subject of an exchange involving real estate. Any type of real estate held for business or investment purposes can be exchanged for any other type of real estate. This would include residential real estate, commercial real estate, undeveloped land, a condominium and under certain circumstances, a co-operative.

Although a deferred exchange may be structured in a number of ways, the normal method is to utilize a "qualified intermediary" who theoretically sells your existing property and purchases the replacement property. The funds from the sale of your existing property must be held in escrow and you may not have access to those funds until you purchase the replacement property at which time the intermediary will provide those funds to the settlement agent who is handling the purchase of the replacement property. A qualified intermediary cannot be a family member, your lawyer or accountant who has performed any services for you within the last two years. I utilize a separate limited liability company which is called Title Exchange of Virginia, L.C. as the qualified intermediary to act on your behalf in the transaction. The funds from the sale of the exchange property will be deposited in a local bank in a certificate of deposit with no penalty for an early withdrawal during the period between the sale of the exchange property and the purchase of the exchange property.

The contract to sell the exchange property should contain the following clause:

"This sale is part of a tax deferred exchange for like kind property to be designated by the Seller. Purchaser agrees to cooperate with Seller at no additional cost or liability and agrees that Seller may assign this contract to a qualified intermediary".

The contract to purchase the replacement property should contain the following clause:

"This purchase is part of a tax deferred exchange for like kind property sold by the purchaser. Seller agrees to cooperate with Purchaser at no additional cost or liability and agrees that Purchaser may assign this contract to a qualified Intermediary".

The qualified intermediary will attend to providing proper wording and documentation to the settlement agent involved in the sale of the exchange property and the purchase of the replacement property.

There are two time requirements involved in a tax deferred exchange. The first is that the replacement property must be designated within forty-five days from the date of settlement on the sale of the exchange property and the purchase of the replacement property must occur within 180 days. Designation of the replacement property should be made in writing by facsimile (703-237-3978) to the qualified intermediary within the forty-five day period with the day after settlement being counted as the first day. Up to three properties may be designated prior to end of the forty-five day period. A signed contract will act as a proper designation if signed within the forty five day period.

The minimum fee for handling a tax deferred exchange is $600.00 including one replacement property. Each additional replacement property is $150.00. There will be a wire fee of $20.00 for each replacement property and there may be overnight delivery fees of $21.00. However, there could be additional fees if the situation requires researching a unique or ambiguous issue or related tax questions to provide proper guidance. I prefer to work with your accountant for assistance in these matters.

I have eighteen years of experience in handling tax deferred exchanges in most of the states and one in a territory with sale values up to $14,000,000.00 and up to six replacement properties.

There is no charge for either a preliminary telephone or personal conference concerning whether or not to use a tax deferred exchange.