When selling a business, consideration of the tax consequences, including a 1031 exchange is often not at the top of the list. Following a meeting with your CFO or CPA, the federal, state and recaptured depreciation tax obligation is determined and now included in the dizzying array of outcomes as is the decision of whether or not to replace the assets. By replacing all or some of the assets, the federal, state and recaptured depreciation taxes can be deferred in a 1031 exchange. Rather than paying the tax, those dollars can be used towards as an interest free loan towards acquiring replacement property. The tax obligation does not go away, but is postponed; delayed until time the newly acquired property is sold. Another 1031 exchange is possible, or should the assets be inherited, the basis is stepped up to the heirs.
1031 Exchange Blog
Over the past 17 years, we have had the pleasure of guiding thousands of Exchangors through the 1031 Exchange process. Our Blog draws from that experience and includes content ranging from the basics of an Exchange for first time Exchangors to detailed commentary on complex exchanges for the expert investor. If you do not find the topic or specific question you are looking for, reach out to us via email at info@atlas1031.com or call our office to speak with our team at 1 800 227 1031.
1031 Exchange Timeline Requirements
A 1031 exchange timeline begins with your CPA suggesting the tax deferral strategy. You are in the process of selling and replacing real estate, whether that is land, a vacation rental or commercial property or aircraft used in business, artwork, vintage car, livestock or classic musical instrument and now need to research how to initiate and what is a 1031 exchange. What do you do? What are the timelines, what haven’t you done, is there time? As long as you have not closed and received the net equity from the sale, there is time. I promise as an Eagle Scout earned years ago when Richard M. Nixon was President.
1031 Exchange Deferred Improvement
A deferred improvement exchange is when the exchangor uses the exchange proceeds or funds towards making improvements to the replacement property following the first leg event or sale of the relinquished property. The only difference between a deferred improvement and a reverse exchange is the sequence of events. In either 1031 exchange, the improvements must be made while an Exchange Accommodator Titleholder (EAT) is on title. A Qualified Exchange Accommodation Agreement (QEAA) is entered into by the exchangor, EAT and the Member of the EAT qualifying for the safe harbor protection provided by Revenue Procedure 2000-37.
Oil and Gas Royalties 1031 Exchange
It is the opinion of those who earn their livelihoods interpreting Internal Revenue Code tax regulations that oil and gas royalties should be treated as interests in real property for purposes of Code Section 1031, not as securities for purposes of the 1031 Code or as a partnership for purposes of Code Section 1031(a)(2)(D). Seek tax counsel to determine whether the Purchase and Sale Agreement, Management Agreement and Private Placement Memorandum between the taxpayer and sponsor marketing the mineral royalty comply with Code Section 1031.
1031 Exchange Rules Colorado
Colorado Consumer Protection Act at Colorado Revised Statutes § 6-1-721 codified House Bill 09-1254 on April 16, 2009 to provide protection for Colorado residents engaging qualified intermediaries or exchange facilitators to accommodate a 1031 exchange. Colorado, along with Washington, Oregon, California, Idaho, Nevada, Virginia and Maine, have legislated civil and or criminal penalties for qualified intermediaries who do not follow their statutes.
The Internal Revenue Code Section 1031 exchange allows an individual, trust, corporation or non-resident foreigner to defer the gain or loss when selling property held for productive use in a trade, business or for investment and exchanged with property held for productive use in a trade, business or investment. This means that the federal and state capital gains rate and recaptured depreciation tax, representing upwards of 40 percent of the sales price is deferred indefinitely or until time the replacement property is sold. Real property is eligible given limited personal use. When vacation property is sold, no more than 14 overnights per year are allowed for use by the taxpayer, friends or family.
1031 exchanges must follow strict rules enforced by the IRS. One of requirements is to use a qualified intermediary whose role is the preparation of exchange agreements in accordance with the Treasury Regulations and holding the net sales proceeds in a safe, liquid escrow account. The qualified intermediary industry is not regulated. Consequently, anyone can be a facilitator of 1031 exchanges. As a result, there have been qualified intermediaries who have not acted in the best interest of their clients. Clients have lost their proceeds, exchanges fail and the taxes are due.
The Colorado House Bill implements substantial steps to prevent qualified intermediaries from stealing their client’s exchange funds. Though not applicable to bank owned accommodators or personal property exchanges, the law requires qualified intermediaries and facilitators to:
- Maintain a $1 million or greater fidelity bond and errors and omissions policy of at least $250,000 OR deposit cash or irrevocable letters of credit of at least $1,250,000 in an interest-bearing account OR deposit all exchange funds in an escrow or trust account that requires both the client’s and the exchange facilitator’s authorization for withdrawal
- Client’s written authorization for disbursement required if exchange account exceeds $250,000
- Client’s written authorization if funds held in qualified escrow account in lieu of fidelity bond
- Notify clients within 2 business days if greater than 50 percent of assets or ownership interests transfer within 12 months, and
- Act as a fiduciary for all 1031 exchange funds received by clients
The law prohibits qualified intermediaries and exchange facilitators from:
- Commingling exchange funds with their operating account
- Loans or transfer of funds to an unaffiliated entity (except an Exchange Accommodator Titleholder)
Violations are punishable as a deceptive trade practice under the Colorado Consumer Protection Act with the accommodator facing both criminal and civil penalties. Consumers are provided a private cause of action against the accommodator that could result in an award of treble damages, attorney’s fees and costs.
Care must be given to engaging a qualified intermediary on factors other than their fee. Download four questions to ask when vetting accommodators by clicking on the button below. These questions represent those that experienced exchangors who have exchanged multiple times ask. They are yours free after answering a couple of questions including your email address to send the pdf file. If you have questions, call our office to discuss, including the specifics of your transaction.
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.
Selling and Acquiring Aircraft Tax Consequences
When selling or acquiring aircraft or aircraft engines held for productive use in a business, it is critical to consider the tax consequences. If not, a five to six figure tax burden could arrive unexpectedly in the mail from state and federal tax authorities. Acquaint yourself with the tax consequences by researching the Internet inputting the long tail keywords “aircraft taxes” or “aircraft sales tax deferral” and seek the counsel of your CPA.