Understanding and following 1031 exchange rules is critical when initiating an Internal Revenue Code Section 1031 tax deferred exchange. Seek the services of a Certified Exchange Specialist© whose designation provides the assurance the taxpayer is benefiting from a 1031 expert who is subject to a strict Code of Ethics and Conduct Preamble.
1031 exchange rules
1031 Exchange Rules
If the government agreed to loan you money and not charge you interest, would you take it? For the smart investor following 1031 exchange rules, the answer is absolutely! This is essentially what the government (Treasury Department and Internal Revenue Service) is doing by allowing taxpayers to defer the payment of capital gains tax after certain transactions, known as the 1031 tax exchange. Completing a 1031 tax exchange is a great way to parlay a taxpayer’s capital gains, but there are plenty of rules to follow in order to do so.
1031 Exchange Rules Aid Property Acquisition
Understanding the 1031 exchange rules is critical for those in the farming business, own business aircraft, an apartment complex, single family investment, land, or who own in any type of business equipment, the chances are that there will come a point in time when a decision will be made to exchange or upgrade company assets. Business owners and CEOs who find themselves in this position should consider a 1031 exchange instead of a traditional sale the next time they prepare for such an acquisition because under these conditions, they will be able to complete the sale while at the same time, defer the 25 percent recaptured depreciation tax that will have been triggered on the sale. While the idea of such a transaction offers clear benefits, there are certain 1031 exchange rules which must be followed in order to keep the process smooth while keeping it out of the crosshairs of the IRS.
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.
1031 Exchange and Short Sale
Mixing a 1031 exchange and a short sale can be done, but often times cannot. Timing can have alot to do with it. A 1031 exchange allows the taxpayer to defer the federal and state capital gains and recaptured depreciation taxes when selling real estate held in the productive use of a business or for investment. After aggregating the taxes triggered upon sale, the tax can be as high as 40 percent of the sales price. If the taxpayer, who can be an individual, husband and wife, trust, corporation, or domestic or foreign follows the 1031 rules, those taxable dollars can be used towards purchasing replacement property and the taxpayer effectively receives an indefinite interest free loan. The tax is ultimately due when the replacement property is sold, unless deferred again in another 1031 exchange.
1031 Tax Exchange Rules
A 1031 exchange is an Internal Revenue Code tax rule that allows taxpayers to defer indefinitely capital gain and recaptured depreciation taxes when selling and replacing with like-kind real or personal property held for productive use in a trade, business or for investment. The tax deferral requires strict adherence to the 1031 tax exchange rules to effectively postpone the tax payment until the replacement property is sold or possibly eliminated if heirs sell, when received or minimized when selling a primary residence that was previously a replacement rental property in a 1031 exchange.