According to the rules of the Internal Revenue Service, a taxpayer is required to pay capital gains taxes on the gain realized from the sale of real and personal property unless an exception to the general rule applies. Capital gains taxes can quickly diminish any profit realized from the sale of a property. For this reason, taxpayers often choose to enter into a Section 1031 Exchange instead of a traditional sale when this option is available. If a transaction qualifies for Section 1031 Exchange treatment, any capital gains tax obligation that would otherwise be due is deferred. Along with the federal requirements for Section 1031 treatment, some states have enacted legislation that applies to these transactions as well. In Maine, for example, Chapter 212C of the Maine Revised Statutes covers the applicable rules for anyone who acts as an exchange facilitator for a 1031 Exchange in the state.
Section 1031 Exchange
In a basic Section 1031 Exchange, a taxpayer enters into an exchange of property instead of a traditional sale. A property is selected to be relinquished and another property located to be the replacement property. In order to qualify, the property to be acquired must be “held for productive use in a trade or business or for investment”. In addition, the entire transaction must be completed within 180 days and a qualified intermediary, or QI, must be used to facilitate the exchange. The role of the QI is to act as the intermediary for titles and funds passing hands during the transaction. In Maine, a QI is referred to as an exchange facilitator and is subject to a number of specific rules pursuant to Chapter 212C.
Exchange Facilitator
To begin with, anyone who wishes to act as an Exchange Facilitator, or EF, in the State of Maine must be licensed by the state and must renew that license, once issued, each year. Along with being licensed by the state, en EF in Maine must comply with the following financial responsibility options:
- Maintain a fidelity bond or bonds in an amount not less than $250,000; OR
- Deposit an amount of cash or securities or irrevocable letters of credit in an amount not less than $250,000 in an interest-bearing deposit account or a money market account with a financial institution; AND
- Deposit all exchange funds in a qualified escrow account or qualified trust and require that all withdrawals necessitate the written authorization of the client.
In addition, an EF is required to comply with the insurance requirements contained in Section 212C which call for an EF to either maintain an errors and omissions insurance policy in an amount not less than $100,000 or deposit an amount of cash, securities or irrevocable letters of credit in an amount not less than $100,000 in an interest-bearing deposit account or a money market account with a financial institution.
An EF in Maine is held to a prudent investor standard with regard to funds held for a client. Among other things, this prohibits an EF from co-mingling funds, loaning funds to someone related to the EF, or invest in something that does not provide sufficient liquidity. Furthermore, an EF cannot do any of the following:
- Mislead a client
- Engage is false or misleading advertising
- Fail to account for funds held by the EF within a reasonable period of time
- Engage in fraudulent or dishonest conduct
- Commit any crime involving fraud, misrepresentation, deceit, embezzlement, misappropriation of funds, robbery or theft
- Materially fail to fulfill its contractual duties to a client
A client who feels that an EF has breached his or her duties to the client may make a civil claim against the funds, insurance, or letters of credit required to be held by the Exchange Facilitator.
To learn when a 1031 exchange makes sense, click here to download a three page eBook summarizing ten reasons to initiate a 1031 exchange.
We Can Help
Atlas 1031 Exchange has been accommodating tax-deferred exchanges of all kinds for more than 17 years. We are fluent in the rules and regulations of IRC Section 1031 and able to help you navigate your exchange.
Contact us today to discuss any questions you may have. Call our office at 1-800-227-1031, email us at info@atlas1031.com, or submit your question through the online form at the top of this page.
