A 1031 exchange allows the taxpayer to defer the recognized gain or capital gains tax when the metal or coin is replaced with like-kind precious metals or coins within 180 calendar days of the sale. The 1031 tax deferral is available to all federal income taxpayers, whether a United States resident or non-resident alien. What differentiates a 1031 exchange from a sale are the supporting documents created by the Qualified Intermediary, adherence of 1031 exchange rules and the condition that the taxpayer does not receive, pledge, borrow or otherwise obtain the benefits of the Exchange Account before the end of the Exchange period.
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: Seller Financing
Given the current tight credit market, taxpayers who want to initiate a 1031 exchange may consider financing or carrying a note for a Buyer to acquire the relinquished property. A 1031 exchange is a strategy to defer the federal and state capital gains and recaptured depreciation tax when selling and replacing property held for productive use in a trade, business or for investment. The tax deferral represents an indefinite, interest free loan that can defer upwards of 40 percent of the sales price. 1031 eligible property includes real property such as timberland, self-storage units, commercial property, single family residential, oil and gas royalty interests as well as personal property including aircraft, precious metals, vintage cars, artwork and collectibles.
1031 Eligible Medical Office Building in Charlotte, North Carolina
This 1031 eligible medical office building located in Charlotte, North Carolina is approximately 44,169 square feet on five plus acres. The building currently has long-term leases with Carolina HealthCare Systems and Christenbury Eye Center. Both tenants have long-term history within the building and have recently extended through 1/31/2023 and 9/30/2020, respectivley.
1031 Exchange Rules: Disqualified Person
When a taxpayer sells a property, capital gains taxes are typically due on the realized gain from the sale. One option that many taxpayers utilize to avoid the immediate payment of capital gains taxes is to enter into a Section 1031 exchange instead of a traditional sale. Transactions that qualify for Section 1031 treatment allow the taxpayer to defer the capital gains taxes due on the realized gain. The basic premise of a 1031 exchange contemplates relinquishing the original property in exchange for a replacement property. The properties exchanged must be of “like-kind” and the entire transaction must be completed within a specified time period.
Constructive Receipt
In addition, a 1031 exchange transaction will be disqualified if the taxpayer actually or constructively receives money, or non-like-kind property, before the taxpayer actually receives the replacement property. The Internal Revenue Code allows for four safe harbors options to ensure that this requirement is met, including the use of a Qualified Intermediary. By using a Qualified Intermediary, the taxpayer can be assured that he or she will not be in actual or constructive possession of the proceeds in violation of the rules for the exchange. In order to take advantage of the Qualified Intermediary safe harbor provision, the person or entity that acts as the Qualified Intermediary must not be a “disqualified person” as defined by Treas. Reg. §1.1031(k)-1(k).
Disqualified Person
For purposes of a Section 1031 exchange, a disqualified person is someone who is considered an agent of the taxpayer at the time of the exchange. Family members, or related persons, of a disqualified person are also disqualified. 1031 exchange rules provide examples of some situations where the Qualified Intermediary could be considered an agent of the taxpayer including, “a person who has acted as the taxpayer’s employee, attorney, accountant, investment banker or broker, or real estate agent or broker within the 2-year period ending on the date of the transfer of the first of the relinquished properties in a like-kind exchange.”
The Regulations further define a disqualified person by clarifying that “services to the taxpayer with respect to exchanges intended to qualify for non–recognition of gain or loss under section 1031, and routine financial, title insurance, escrow, or trust services for the taxpayer by a financial institution, title insurance company, or escrow company, are not taken into account.” Finally, entities that are controlled by the taxpayer are also disqualified. For purposes of a 1031 exchange only, this includes corporations, partnerships, and any other entity that the taxpayer, or a related party, owns either directly or indirectly, more than a 10 percent interest.
Financial Institution
An example of how the rules regarding disqualification of a Qualified Intermediary, can be found in Private Letter Ruling 200630005. In that fact pattern, a specialty finance company wished to expand its services through a subsidiary company owned wholly by the primary entity. The subsidiary would be used as a Qualified Intermediary for transactions entered into by the primary entity. The Internal Revenue Service concluded that the primary “is a financial institution and the making of loans to customers, including loans to finance the acquisition of replacement property in a like-kind exchange where (the subsidiary) is the qualified intermediary, constitute routine financial services. The primary’s sale, or offering for sale, of properties that it owns as replacement property in a like-kind exchange utilizing the subsidiary QI services makes neither the primary nor the subsidiary, the agent of a customer utilizing their services in a like-kind exchange, so long as the finance company does not act as the taxpayer’s real estate agent or broker.”
If you are considering a 1031 exchange and have questions about whether your transaction may include a disqualified person, contact our office for a complimentary consultation or click here to ask a question.
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.
1031 Exchange Rules: Exchange Requirement
Taxpayers frequently enter into a Section 1031 Exchange instead of a traditional sale to avoid the often substantial capitals gains and recaptured depreciation tax obligation due as the result of gains realized upon the sale of real and personal property held for productive use in a trade, business or for investment. If the transaction meets all the requirements of a Section 1031 Exchange, any tax due on the gains realized as a result of the exchange are deferred. Understanding how a Section 1031 Exchange differs from a traditional sale, as well as a full understanding of the rules required for a transaction to qualify for a 1031 Exchange, is essential to taking advantage of the capital gains deferral offered by the exchange.
A Sale vs. 1031 Exchange
In a traditional sale, a seller sells a property and receives the income from the sale at the time of closing. The seller may then decide to purchase another property at the same time or at a later date, but the transactions are separate and distinct. In a Section 1031 Exchange, a seller must both sell and purchase a replacement property as part of one cohesive plan. The transaction will not qualify for Section 1031 treatment unless a replacement property is either identified or acquired by the 45th calendar day following the original property sale. If identified, the purchase of the replacement property is completed within 180 days of the original sale. The Tax Court summed up the concept in Bezdjian v. Commissioner, T.C. Memo 1987-140 by stating “if the Taxpayer’s transfer and receipt of property were interdependent parts of an overall plan the result of which was an exchange of like-kind properties, 1031 applies.”
The use of a Qualified Intermediary is another 1031 exchange requirement that is important to understanding how a Section 1031 Exchange works. Because the transaction is an exchange, not an outright sale, the proceeds from the original sale should never actually be available to the seller as is the case in a traditional sale. Instead, the proceeds are held by a Qualified Intermediary to be used for the purchase of the replacement property. Likewise, the deed for the replacement property must be held by the Qualified Intermediary until the exchange has been completed. Using a Qualified Intermediary is found in the safe harbor rules and “will result in a determination that the taxpayer is not in actual or constructive receipt of money or other property for purposes of section 1031,” according to Regulation 1.1031(k)-1(g)(6).
Finally, it is important to understand that Section 1031 is mandatory. As the court held in U.S. v. Vardine, 305 F.2d 60 (1962), “1031 and its predecessor are mandatory, not optional; a taxpayer cannot elect not to use them.” Although in most cases it is in the taxpayer’s best interest to invoke the benefits of a 1031 Exchange, there may be times when a taxpayer may not wish to do so. As the court pointed out, however, Section 1031 is mandatory.
Complimentary Downloads
To learn ten reasons why a 1031 exchange makes sense, download the complimentary eBook by clicking here. To view a library of complimentary 1031 exchange eBooks for individuals, trusts, corporations, franchise owners, ranchers and farmers, timberland owners, lawyers, CPAs, Realtors and escrow and title officers visit the Atlas 1031 Exchange Resource page.
1031 Exchange Rules: Reporting a Like-Kind Exchange
Internal Revenue Service Form 8824, “Like-Kind Exchanges,” is the two-page form to report gain or loss on a 1031 exchange. The form is filed along with the taxpayer’s federal income tax return to support their intent to initiate and secure the 1031 tax deferral for gain or loss from property held for and replaced by property held for productive use in a trade, business or for investment. When exchanging real estate, the title or closing attorney submits a 1099 to the Internal Revenue Service and provides a copy to the taxpayer. The 1099 reflects the gross sales amount received for the real property. Form 8824 represents the taxpayer’s reporting on how those funds were utilized.
Form 8824 Part I
In Part I, information asked on the exchange includes:
- Description of the relinquished and the replacement property,
- Date the relinquished property was acquired and transferred to other party,
- Date the replacement property was formally identified,
- Date replacement property was received, and
- Whether or not a related party was involved directly or indirectly through a qualified intermediary with a related party including your spouse, brother or sister, parent, grandparent, child, grandchild, or related corporation, S corporation, partnership, trust or estate
Do not report the 1031 exchange on Form 8824 if the exchange was structured to avoid the related party rules; instead report the disposition of the property sold as if the exchange had been a sale.
Form 8824 Part II
If the 1031 exchange was with a related party, the related party’s name, relationship to you, identifying number and address are requested. To understand more about related parties, view
Form 8824 Part III
In Part III, the realized gain or loss, recognized gain and basis of the property sold and acquired are reported. If more than one exchange is completed in the taxable year, Form 8824 should be filed as a summary reflecting the total recognized gain from all the exchanges and the total tax basis for all replacement property. In addition, the taxpayer should include a statement showing individual property information for each exchange. Be sure to review Instruction to Form 8824 for further insight.
Finally, gain from the exchange is reported on Form 4797 for sales of business property or Schedule D for capital assets. Gain received from an installment loan in an exchange is provided on Form 6252. As always, seek the counsel of your CPA to understand specific taxpayer reporting requirements.
Learn ten reasons why a 1031 exchange makes sense by clicking here.
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.