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A Qualified Intermediary of 1031 tax deferred exchanges was instituted by the Internal Revenue Service and Department of Treasury in 1991 as one of four safe harbors to eliminate problems associated with taxpayers having access or control to their exchange proceeds. “A Qualified Intermediary under Safe Harbor No. 3 is not considered the agent of the taxpayer for purposes of a tax-deferred exchange. The taxpayer’s transfer of relinquished property and subsequent receipt of like-kind property is treated as an exchange and the determination of whether or not the taxpayer is in actual or constructive receipt of money or other property before the taxpayer actually receives like-kind replacement property is made as if the QI is not the agent of the taxpayer.” [1]
Exchange Blog
Non Resident Withholding Tax in a 1031 Exchange
A foreign person, including a nonresident alien individual, foreign entity or government, may be subject to a U.S. withholding tax of thirty percent on most types of U.S. sourced income. If a tax treaty exists between the U.S. and the foreign person’s country of residence, a reduced rate, including exemption, may apply. Generally, the tax is withheld from the payment made to the nonresident by a withholding agent. The withholding tax is required under sections 1441, 1442, and 1443 of the Internal Revenue Code.
1031 Exchange Properties Post
1031 exchange properties are made up of real and personal property held for productive use in a trade, business or investment. When sold, 1031 exchange properties trigger federal and potential state capital gains and recaptured depreciation taxes that can amount to 40 percent of the sales price. A 1031 exchange allows for the individual, corporation or partnership, either domestic or foreign to defer these taxes given a replacement 1031 exchange property is acquired within 180 calendar days post-closing on the old real or personal property of equal or greater value.
1031 Land: Like-Kind Requirement
Often the question is asked whether in a 1031 like-kind exchange must land be exchanged for land. The answer is found in the like-kind requirement under Internal Revenue Code (IRC) Section 1031. To qualify for consideration in a 1031 exchange, the relinquished or old property and the replacement property must be like-kind. Property is either real or personal property held for productive use in a trade, business or for investment.
Conservation Easements and A Section 1031 Exchange
Taxpayers who are looking to reduce taxes on the sale of property often consider the possibility of entering into a Section 1031 Exchange in lieu of a straight sale. If the transaction qualifies, any capital gains taxes that would otherwise be due can be deferred until the sale of the replacement property. Among other requirements, a 1031 Exchange requires the seller to exchange the property for a property of “like-kind” in order to be eligible for 1031 Exchange treatment. The “like-kind” component of a 1031 Exchange can create confusion when specific rights to property, such as an easement, are exchanged instead of the all rights to the property.
LKE Analysis
One of the fundamental rules of a 1031 Exchange is that the properties exchanged must be of “like-kind”. Given the importance of this rule, understanding what qualifies as “like-kind” is imperative to using a 1031 Exchange to your advantage. If the transaction qualifies for Section 1031 Exchange treatment though, the capital gains tax obligation can be deferred, potentially saving a substantial amount of money that can then be re-invested.