NNN 1031 Exchange Blog

Florida NNN Properties for 1031 Exchanges

Net Leased Properties Can Provide Reliable Income for Retirement With Little or No Management

Written By: Patrick Moorton - Mar• 18•12
Freestanding Walgreens and Freestanding CVS Are Popular With Investors

Tenants of Net Leased Properties

Net Leased Properties with National Credit Tenants can offer reliable income with the security of prime real estate as collateral. The current economic crisis has been very hard on some property owners. Increased vacancies and rent concessions sought out by tenants have lowered property values around the world. If you have been an owner of investment properties like Office Buildings, Shopping Centers or Apartment Buildings you know how intense management can be at times.

   If you have owned these properties for a long time you may want to consider selling them and replacing them with single tenant net leased properties.These types of properties are less likely to have to offer rent concessions due to their single purpose and long term lease structure. You are really buying into the long term stream of income that is guaranteed by a multi billion dollar corporation and collateralized with the land and building.

   Ideally, a self amortizing loan will pay off the property and leave the property free and clear of debt at the end of the 20 year lease period. If the tenant should leaves after the initial 20 year lease, you have a valuable asset that you can sell that is free and clear of debt. In many cases the tenant will have negotiated several options to renew the lease for 5 year periods after expiration of the initial lease term.  If they stay your return on investment increases substantially after the mortgage on the property has been paid off.

   These prime investment properties with long term leases and credit tenants are used often by investors to create income for future generations. Single tenant net leased properties with tenants like JP Morgan Chase, CVS, Walgreens, Bank of America or McDonalds are used by Individual Investors and Institutional Investors to create reliable income streams for retirement and estate planning.

Patrick Moorton is President of Income Realty Advisors Inc. Owner and operator of NNN1031Exchange.com, an online resource for investors buying and selling Single Tenant Net Leased Properties with Credit Tenants in Florida. For more information please visit http://www.NNN1031Exchange.com

Net Leased Properties Are A Powerful Tool For Creating Wealth

Written By: Patrick Moorton - Mar• 03•12

The real estate market conditions over the past several years caused quite a few real estate developers and investors to lose a great deal of money. Even some of the most experienced and successful developers suffered financial difficulties.Wall Street investment bankers jumped into the market. They had easy access to capital they began overpaying for properties in almost every asset class. They made their money by creating mortgage backed securities and other complex financial instruments. They paid enormous prices and seemed to disregard the fundamentals of real estate investment.

Why would any body want to own high risk properties that are difficult to manage and subject to market fluctuations at very low returns? The answer is simple; they were using other people’s money. They had access to grandma’s pension fund and apparently had little regard for the long term welfare of the beneficiaries of these funds.It is unbelievable that so many investors are willing to put their money into the hands of an industry that bet grandma’s farm and lost it. Only on Wall Street can investment bankers lose billions of dollars for investors and then get a contract to manage a State pension fund worth billions for retirees.

What can an investor do to take control of their financial future?

You must maintain control over your assets. It is wise to get investment advice from professionals but don’t give up control. One asset class that has endured the test of time is the Single Tenant Net Leased Property with credit worthy tenants. These properties are for investors not speculators. Even during the financial crisis large public companies like Walgreens, CVS, Bank of America, 7-Eleven, and McDonalds continued paying rent on the properties that they were leasing. The owners of these properties were still getting their rent checks every month because these properties are a vital part of their tenant’s business operations and they depend on sales from their retail locations for their cash flow.

Now that land prices have fallen to more reasonable levels, companies with strong financials will begin to expand again at a careful pace. Their cash reserves are now best spent improving their operations and low interest rates will allow them to take advantage of market conditions and pick up some great new sites that may have been abandoned by other retailers when the markets were in crisis.

Investors in Single Tenant Net Leased Properties will have an opportunity to acquire new properties as these firms begin to build more stores. Prices have been rising on these properties as demand from investor’s increases. Insurance companies and Real Estate Investment Trusts have allocated billions of dollars to acquire net leased properties.

Insurance companies are frequent investors in mortgages for single tenant net leased properties with credit tenants. They also buy them free and clear of debt to fund their long term obligations to policy holders and investors.

Single Tenant Net Leased properties have been used by high net worth investors to set up long term reliable income streams for estate planning purposes for many years. These properties are for long term investment to build equity over time. Using conservative leverage an investor can get a self amortizing loan that will provide a steady income and pay off the property over the term of the lease.Careful consideration of the credit worthiness of a tenant and location of the property are extremely important to make sure that the tenant is in a location that will be a profitable one. It is to the investor’s advantage that these companies have site selection down to a science and in most cases they can tell by the demographics and traffic in a location whether or not they will be successful at a particular location.

The goal of buying a single tenant net leased property is to provide a reliable income stream for you and your family. If you focus on prime locations and pick the best of several available, your chances of having a great long term investment will be increased.  Owning real estate in a prime location with rent guaranteed by a billion dollar corporation puts you in control of your assets. Net leased properties offer the owner an opportunity to build equity of a long period of time with little or no management responsibilities. A good net leased property can help you carefully plan your financial future.

Patrick Moorton is President of Income Realty Advisors Inc. Owner and operator of NNN1031Exchange.com, an online resource for investors buying and selling Single Tenant Net Leased Properties with Credit Tenants in Florida. For more information please visit http://www.NNN1031Exchange.com

Nine Steps to 1031 Success

Written By: First American Exchange Company - Aug• 04•11

1. TAX ADVISOR: Consult your tax or financial advisor to determine if a tax-deferred exchange is appropriate in your situation, and compatible with your investment goals. SALE OF THE RELINQUISHED PROPERTY

 2. LIST PROPERTY: List the property with a licensed Real Estate Broker and include “intent to exchange” disclosure in the listing agreement.

3. BUYER ACKNOWLEDGMENT: In the purchase agreement for the Relinquished Property include provisions informing Buyer of the Seller’s intent to exchange.

4. CONTACT FIRST AMERICAN EXCHANGE: When escrow is opened on the Relinquished Property, just give us a call to start the exchange process.

5. RELINQUISHED PROPERTY CLOSING: All exchange documentation will be sent to escrow and must be executed prior to transfer of Relinquished Property to the buyer. PURCHASE OF THE REPLACEMENT PROPERTY

6. IDENTIFICATION DEADLINE: Within 45 days of the close of the Relinquished Property notify First American Exchange in writing of “Like Kind” Replacement Property.

7. SELLER ACKNOWLEDGMENT: In the purchase agreement for the Replacement Property include provisions informing Seller that Buyer is completing an exchange.

8. REPLACEMENT PROPERTY: Notify First American Exchange when you open escrow on the Replacement Property. All exchange documentation will be sent to escrow for your execution.

9. ACQUISITION DATE: Close escrow on the Replacement Property within 180 days from the transfer of the Relinquished Property. The Replacement Property must be acquired prior to filing your tax return for the year the Relinquished Property was transferred. An extension to your tax return may be necessary. IMPORTANT: To be fully tax deferred, acquire replacement property equal or greater in value, equity and debt (unless additional cash is added to offset debt relief).

First American Exchange Company 800.556.2520 First American Exchange is a Qualified Intermediary and is precluded from giving tax or legal advice. You must consult with your tax or legal advisor about your specific circumstances. First American Exchange is a wholly owned entity of First American Title Insurance Company. www.firstexchange.com ________________________________________

Alternative and Multiple Properties – Tax-Deferred Exchanges for Apartment Buildings

Written By: First American Exchange Company - Jan• 25•11

Many real estate investors know that capital gains taxes can be deferred with an exchange of property meeting the requirements of Section 1031 of the Internal Revenue Code. An exchange differs from a sale in that an exchange requires a transfer of property for property. A sale of property is a transfer of property for money. The primary advantages with an exchange are to defer the capital gains tax and to fully use your equity for the acquisition of other property. Even with the reduction of the capital gains tax rates, the benefits of Section 1031 can be very substantial.

The rules of Section 1031 can trap the unwary, resulting in a loss of some or all of the tax deferral benefits. The use of a tax advisor familiar with those rules is recommended. An experienced advisor is especially important if your exchange involves multiple properties. Other issues can come into play, such as:

What does it mean if some property is “incidental” to the exchange?
Is the transaction a single exchange or multiple exchanges?
Must the same Taxpayer that started the exchange also finish it?

Alternative and Multiple Properties
To ensure a valid exchange, potential replacement property must be identified within 45 days from the transfer of the relinquished property and acquired within 180 days from the same transfer date, unless the transfer occurs after later in the year when the 180-day period can be shortened by the due date of your tax return. If you transfer multiple relinquished properties through one exchange, the identification and exchange periods begin on the date of transfer for the first relinquished property.

Example No. 1: Let’s assume you transfer four apartment buildings with the first closing on November 1st, the second closing ten days later and the third and fourth closings fifteen days later. The 45-day identification period will end on December 16th, not on December 25th or January 9th. The exchange period will end on April 15th unless you obtain an extension to file your tax return and thus extend the exchange period to the full 180 days.

No matter how many relinquished properties are transferred as part of the same exchange, the limits on the number of potential replacement properties that can be identified remains the same. You can identify up to three properties without regard to their fair market values or any number of properties, provided that the fair market values of all identified properties don’t exceed 200% of the relinquished property values. In other words, if you identify more than three properties, make sure that the values of those properties do not exceed two times the value of the relinquished properties. There is no difference between identifying too many properties, and not identifying any properties. Your exchange will fail due to an improper identification.

There are two noteworthy exceptions to the identification rules:  (1) any replacement property that you acquire within the identification period is presumed to have been properly identified; and (2) or if you acquire replacement properties with a total value of at least 95% of the values of all the identified replacement properties.

Example No. 1: If you transfer a property for $100,000 and identify four properties worth $55,000 each, you will be treated as if you did not identify any properties unless you close on all four properties. Acquiring three of the four will not be sufficient because they amount to only 75% of the aggregate fair market values of the replacement properties, not the required 95%.
Incidental Property
The exchange rules apply whether you exchange real property for real property or personal property for personal property, but what about transactions that involve both property types. For example, in apartment building or hotel transactions, personal property such as furniture or laundry machines will be included with the sale of the real property. The personal property items are not considered ‘like-kind’ to the real property. For purposes of the identification rules, “incidental” personal property does not have to be identified separately if the aggregate value of those items does not exceed 15% of the value of the larger item of property (i.e. the real estate). An incidental item is something transferred with a larger item in standard commercial transactions.

For purposes of the 3-property rule, the building, furniture, laundry machines, and other personal property are treated as one property. The properties are all considered to be unambiguously described if the legal description, street address, or distinguishable name of the building is specified, even if no reference is made to the furniture, laundry machines, and other personal property. In those instances when the incidental property is greater than 15% of the value of the larger item, a separate identification will be needed.

It is important to note that even though a separate identification is not required for those incidental items, those items cannot be ignored in the exchange. Such items will be considered taxable “boot” if not replaced with other like kind items.
Single or Multiple Exchanges

A single exchange can involve multiple relinquished and replacement properties. The time periods begin on the date of transfer for the first relinquished property. The limits on the number of properties that can be identified do not increase simply because the exchange has multiple properties. In addition, it may be challenging to use one exchange for multiple relinquished properties closing on different dates.

Depending on your circumstances, creating more than one exchange may be to your advantage. You may have more flexible time periods and the potential to identify additional replacement properties. Be aware that the IRS may try to recharacterize your separate transactions as being only a single exchange. For example, if all of the buildings are transferred to a single buyer under one contract, using the same escrow, the IRS could argue that the transaction is one exchange. Another relevant factor is whether the relinquished properties are contiguous and/or operated as a single property.

If separate exchanges are to be used, it is important to retain competent tax advice and make each relinquished property closing separate and distinct from the other closings.

Same Taxpayer Requirement

While it would seem obvious, the same Taxpayer that transfers the relinquished property needs to acquire the replacement property. There are circumstances when the owner of the relinquished property will be different in name from the owner of the replacement property. Such situations are common with larger properties. A lender will often require that the owner of the replacement property be a bankruptcy remote entity. In most states, a single member limited liability company (“LLC”) is permitted. Federal tax laws permit an LLC to elect to be taxed as a sole proprietorship, and thus the entity is disregarded for tax purposes. In a number of private letter rulings the IRS has approved the use of a single member LLC for the acquisition of replacement property, without violating the same Taxpayer requirement. When considering an exchange it is strongly suggested that you seek the advice of your legal counsel or other tax advisor on your specific circumstances.
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First American Exchange Company
800.556.2520

First American Exchange is a Qualified Intermediary and is precluded from giving tax or legal advice. You must consult with your tax or legal advisor about your specific circumstances. First American Exchange is a wholly owned entity of First American Title Insurance Company.

www.firstexchange.com

Diversified Net Lease Retail Portfolio Offered at $48,573,520

Written By: Patrick Moorton - Jan• 15•11

 A highly performing and geographically diverse portfolio of properties is now being offered for sale. The portfolio is made up of 16 properties in Major MSAs and includes tenants such as Bank of America,BB&T Bank,Capital One Bank,Walgreens,AT&T,CVS,Mimis Cafe,Taco Bell,Ryan’s,Dollar General, and Advanced Auto Parts. The portfoilio is offered free and clear of debt at a 7% Cap Rate and has average rent increases of over 1% annually. For more information contact patrick@nnn1031exchange.com

Vesting Title in a 1031 Exchange

Written By: First American Exchange Company - Jan• 15•11

In order to obtain the benefits of exchange treatment, the same person who started the exchange must complete the exchange. While this seems simple enough, the manner in which title to the “relinquished property” was vested may, due to a variety of circumstances, differ from the manner in which title to the “replacement property” must be vested. The following are some of the most common circumstances that impact vesting of title in a 1031 tax-deferred exchange.
Marital/Community Property Issues
In California and other community property states, community property issues often creep in when the Taxpayer is married, even if the exchanger acquired property in his or her name separately. For example: Timothy Taxpayer inherited a parcel of real property from his aunt prior to marrying his wife, Trisha. Throughout his marriage, the parcel remained his separate property. Timothy decides to do a 1031 tax-deferred exchange, and enlists the services of a Qualified Intermediary (QI). After the relinquished property closing, Timothy identifies replacement property and enters into a purchase and sale agreement with the seller. The escrow officer closing the replacement property asks Timothy how he will be taking title to the property; as a married man as his sole and separate property or if Trisha will be sharing in the ownership of the property. Timothy decides that title should be vested in himself and his wife as community property, so that upon the death of one of them the survivor will receive a “stepped-up basis” in the property and be able to avoid the capital gains tax. A grant deed is prepared and recorded conveying title to “Timothy Taxpayer and Trisha Taxpayer, husband and wife as community property”

Though Timothy and Trisha may be happy with their decision, the IRS is not. This is because Trisha is a separate Taxpayer from Timothy, and not a party to the exchange. From a tax point of view, when Timothy takes title to the replacement property with Trisha, he is considered to have made a gift to his wife of a half interest in what was, originally, 100% of his separate property. Both the IRS and the courts have taken the position that if replacement property is disposed of immediately after the exchange, the property would not be viewed as being held for a qualified purpose under IRC Section 1031. Specifically, the IRS has invalidated exchanges where the Taxpayer has gifted away all or a portion of the replacement property immediately following the exchange. Whether an immediate gift to one’s spouse would invalidate an exchange has never been decided, but it is a risk that the Taxpayer may not wish to take.
Lender Requirements
When acquiring a replacement property that requires a new loan, the lender will require that certain conditions be met before funding the loan – conditions that sometimes cause vesting problems to arise in the exchange. For example, if an exchanger wishes to acquire title to property as an individual, but is relying on a spouse or parent’s income to qualify for the loan, the lender will likely require that the spouse or parent appear on title to the replacement property. However, if the spouse or parent is added to the relinquished property title to make the vesting consistent, the IRS can argue that the exchanger gifted away half of his interest immediately before the exchange, and is only entitled to tax-deferral on the remaining half interest that he is exchanging. To avoid this problem, an exception to the “same taxpayer” requirement can be utilized if a written agreement is executed stating that the co-signing spouse or parent is appearing on the loan documents in trust only, and that the replacement property is to be considered the exchanger’s separate property because no gift is intended.

Lenders also commonly require borrowers to take title to the property that is collateral for the loan in the form of a newly created entity that owns only that property. That way, if the borrower files bankruptcy or a judgment is recorded against the borrower for something unrelated to that property, the lender is assured that the property is not affected, because the claims would appear in the individual’s name, not the name of the new entity. For single exchangers, this can be accomplished by creating a single member LLC to take title to the replacement property. If a husband and wife are exchanging property, they can create one LLC with the husband and wife as the only members, provided the property is community property. For married exchangers acquiring property that is not community property, two LLC’s are created, one that is owned by the husband and the other that is owned by the wife.

Conversely, some lenders prefer to loan to people in their individual names in situations where the person appears on title as a Trustee. If the Taxpayer is relinquishing property in the name of a Grantor Trust (Revocable Living Trust), there is usually no problem with the Taxpayer taking title to the replacement property in his individual name, since both the Taxpayer and the trust have the same taxpayer identification number. Vesting concerns arise when an exchange involves an irrevocable trust because such trusts often carry a different taxpayer identification number than the exchanger. To avoid this inconsistency, the Taxpayer/Trustee would be wise to confirm that the lender loans to a trust before starting the exchange.
Business Considerations
A 1031 tax-deferred exchange becomes more complicated when the exchanger is a business entity, such as a partnership or corporation. Though a partnership may exchange its real property for other real property to be owned by the partnership, individual partners cannot exchange their partnership interests for other real property.

This is because partnership interests are specifically excluded from exchange treatment under Internal Revenue Code Section 1031. Other vesting problems that arise in a business entity context include the formation, merger and dissolution of corporations and LLCs. In two letter rulings, the IRS approved transactions involving related LLCs and corporations, the facts of one of these went basically as follows. An LLC transferred the “relinquished property”, and after the transfer the following events occurred:

The LLC was dissolved and its assets distributed to its corporate parent;
The corporate parent merged with an affiliated corporation;
The affiliated corporation (the surviving corporation after the merger) then formed a new LLC; and
The new LLC acquired the replacement property.
Because the LLCs at both ends of the transaction had elected to be “disregarded entities” their parent corporation was considered the Taxpayer. When the corporations were merged together they became the same taxpayer, so throughout the exchange the same Taxpayer was involved. Private letter rulings are binding upon the IRS only as to the particular Taxpayer involved and may be modified or revoked even as to that Taxpayer. A Taxpayer should definitely consult with an attorney and/or CPA before structuring any exchange in which the form of the business entity involved will be altered to ensure that there will be no problem with consistency of vesting on the relinquished and replacement properties.

There are numerous other scenarios that could illustrate the importance of consistency of vesting in a 1031 tax-deferred exchange, and there are other exceptions to the “same Taxpayer requirement” that may apply, such as when the Taxpayer dies (in which case the Taxpayer’s estate or trustee may complete the exchange), or there is a corporate merger/reorganization or partnership/limited liability company conversion during the exchange period, as briefly discussed above. The basic rule to remember is that no tax deferral will result if the “relinquished property” disposed of and the “replacement property” acquired are not vested in the same Taxpayer.
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First American Exchange Company
800.556.2520

First American Exchange is a Qualified Intermediary and is precluded from giving tax or legal advice. You must consult with your tax or legal advisor about your specific circumstances. First American Exchange is a wholly owned entity of First American Title Insurance Company.

www.firstexchange.com

NNN 1031 Exchange

Written By: Patrick Moorton - Jan• 14•11

This Blog was created to provide investors with information about Single Tenant Net Leased Properties and Real Estate Exchanges as allowed under I.R.C. Section 1031. Each of these  are excellent tools for the creation of wealth but when used together they create a powerful method for both building and preserving wealth.

Real Estate Exit Strategies

Written By: First American Exchange Company - Jan• 07•11

When interest rates rise and the real estate market starts turning “softer,” you may ask yourself the question “Do I want to continue owning real estate, or should I sell and consider other investment alternatives?” There are many wise investment alternatives, but the problem with selling real estate to get into them is that the capital gain tax will be triggered, and you will have less equity to reinvest.

There are, however, a few options that offer the ability to exit the real estate market while reducing or avoiding the capital gain tax.  Many of these strategies are complex and their suitability is totally reliant on your particular facts and circumstances, so be sure to talk with your tax or legal advisor before pursuing any one of these alternatives.

Option 1:  The 1031 Exchange

 

Internal Revenue Code Section 1031 applies to “property held for productive use in a trade or business or for investment,” and it allows for the deferral of capital gain tax if such property is exchanged solely for property of “like-kind.”  The broad definition of like kind can help investors in many ways.  For example, owners tired of the property management headaches of several properties can leverage their equity into one larger one.  IRC Section 1031 also has broad geographic application, applying to real estate throughout the United States.  For example, if properly structured a couple owning rental houses in California who have kids attending college out of state can exchange their California rentals for investment properties that their children can rent from them while attending college.  Many investors exchange real estate all of their lives and leverage their unused tax dollars to purchase real estate that generates greater and greater returns.  Once investors retire, they can then sell real estate and take.

the cash, paying the lowest capital gain tax possible due to their income tax retirement bracket. Even better yet, investors can leave their real estate holdings to their children, who will inherit the property at a stepped up basis, thereby eliminating any gain that had accumulated throughout the years!   

Option 2:  An Installment Sale

An installment sale, aka seller carryback note or seller financing, works best for real estate investors who want to sell their real estate but don’t need a lump sum payment.  Instead of receiving a lump sum of money at the time of sale, buyers pay the seller monthly income at a rate and term to be decided by the seller.  Taxes are not actually avoided nor totally deferred with a note; they are due yearly based upon the amount of payments the seller receives.  The Charitable Remainder Trust is also based upon this “money over time” concept.  The tax benefit of installment reporting is that because taxes are not due in one lump sum at the time of sale, interest is earned on the deferred dollars over the years. Always discuss the transaction with your tax advisor, however, as installment sale reporting may be disallowed or restricted if not structured properly. 

Option 3:  The Charitable Remainder Trust (CRT)

A CRT allows an investor to receive lifetime monthly payments after transferring the asset to a trust.  With this option, the asset is transferred to a trust, the trust can sell the property without paying tax and makes periodic distributions to the investor, and the charity inherits any remaining funds once the investor dies.  The main advantage of a CRT is that in addition to monthly cash flow and the satisfaction of one’s philanthropic objectives, the donor qualifies for a charitable income tax deduction, which is usually the present market value of the remaining interest to the charity.  Additionally, if the deduction is not all used during the first year of contribution, it may be carried forward and utilized over five years.   

Option 4:  Joint Use of IRC Sections 121/1031

When a personal residence is sold, IRC section 121 allows for capital gain tax exclusion of up to $250,000 if a taxpayer is single, and $500,000 if a taxpayer is married, as long as the residence has been owned and personally used by the taxpayer for an aggregate of two of the preceding five years before the sale.  With the enactment of Rev. Proc. 2005-14, there is now a way to exclude gain in excess of the $250,000/$500,000 limits.  For example, if a house was bought for $100,000 20 years ago, and it is now being sold for $1 million, the taxable gain is $900,000.  Under the old law, taxes would be owed on $400,000 of gain. Under the new law, if a married couple first converts the house to a rental, they can exclude $500,000 tax free at closing under IRC.

Section 121, and then perform a 1031 exchange and buy another rental house for $500,000, to exclude the remaining $400,000 of gain! 

Option 5:  Gifting Real Estate Interests

If you wish for your children to own a portion of your real estate while you are still alive, you can gift portions of the real estate to them each year in the amount of the annual gift tax exclusion ($13,000), or if a Family Limited Partnership (FLP) is set up, you can gift limited partnership interests to the children using the annual gift tax exclusions (plus the FLP can be discounted).  One caveat: Unlike inheriting real estate in which the heir’s basis is the fair market value of the property as of the date of inheritance (“stepped-up” basis), a donee’s basis from a gift is the same as the basis of the donor, so your children may wish to consider a 1031 exchange or other options in this newsletter when they sell their real estate to avoid a big capital gain consequence.

There are many other strategies that can be used in lieu of these options, and often the best results come from a combination of techniques.  There are also many risks and disadvantages associated with all of the options; for example, Charitable Remainder Trusts can be costly to structure. In addition to consulting with a tax advisor, investors should seek the advice of a real estate attorney with experience in tax and business, and also consider the advice of a financial planner who can offer even more options for one’s investment portfolio. 

First American Exchange Company
800.556.2520

First American Exchange is a Qualified Intermediary and is precluded from giving tax or legal advice. You must consult with your tax or legal advisor about your specific circumstances. First American Exchange is a wholly owned entity of First American Title Insurance Company.

www.firstexchange.com

About the 1031 Exchange

Written By: First American Exchange Company - Jan• 06•11

Frequently Asked Questions

 
[Q] Why do I need a Qualified Intermediary?

[A] A Qualified Intermediary is necessary to create the exchange of properties required under Section 1031. First American Exchange simplifies the exchange process by accepting a transfer of your property, conveying it to a buyer, taking custody of the proceeds, buying the replacement property, and transferring title to you. It is a sensitive role requiring experience, special knowledge, and extreme care to preserve the tax-deferred character of the transaction.
[Q] Can anyone serve as a Qualified Intermediary?
[A] No, there are certain persons who may not act as your Qualified Intermediary. Generally, these include certain relatives, or someone who, within a two-year period prior to your exchange, has acted as your attorney, accountant, real estate broker, or agent.
[Q] What characteristics should my advisors and I look for in selecting a Qualified Intermediary?
[A] Experience, financial stability, and customer satisfaction are factors that you should consider. First American Exchange possesses all of these characteristics.
[Q] If I select a Qualified Intermediary, do I still need a legal or tax advisor?
[A] Qualified Intermediaries are appointed to carry out the exchange and prepare the necessary documentation for tax deferral, but we are precluded from counseling you on the desirability or tax implications of an exchange.
[Q] How do I identify replacement property?
[A] The identification of replacement property must be submitted in writing, unambiguously described, signed by you, and delivered or sent before midnight of the 45th day. First American Exchange will provide you with forms to assist you with this requirement.
[Q] What happens if I change my mind about buying a replacement property and want to cancel my exchange?
[A] If you transfer the relinquished property and do not replace it with another, the sale will create a taxable event and any capital gain will be subject to federal and state capital gains taxes. Additionally, if you decide to cancel your exchange after First American Exchange receives the exchange proceeds, certain restrictions apply to all Qualified Intermediaries that limit access to those proceeds until certain time periods have elapsed. Our exchange professionals are available to discuss those restrictions.
[Q] What happens if I sell a property and then decide I want to make it a part of a tax-deferred Exchange?
[A] If you actually or constructively received proceeds from the sale, it might not be possible to include that property in a tax-deferred exchange. That’s why it’s important to note your intention to make this transaction part of a tax-deferred exchange in the contract to sell the relinquished property. If you have entered into a contract to sell, but have not closed, it may be possible to carry out a deferred exchange, provided you execute the proper exchange documents, identify the replacement property within 45 days of the closing, and actually receive it within 180 days or before your tax return is due. Your attorney or tax advisor can help you to make that determination.
[Q] What is boot?
[A] “Boot” can be cash received from the sale of the relinquished property or other non-cash consideration, including any property that is not “like-kind,” promissory notes, or debt relief (mortgage boot). If you receive boot in an exchange, it is likely that all or some portion of the boot will be taxed.
[Q] Do I need to do a tax-deferred exchange for my personal residence?
[A] No, your principal residence is not considered property held “for productive use in a trade or business” or “for investment,” and therefore, does not meet the requirements of Section 1031. However, Internal Revenue Code Section 121 allows an individual to exclude from taxation up to $250,000 of the capital gain realized on the sale of the individual’s principal residence. A married couple filing jointly can exclude up to $500,000. Section 121 has certain requirements that must be met.
[Q] Can I just sell my relinquished property and put the money in a separate account and use that to purchase my replacement property?
[A] No. You cannot receive the proceeds or take constructive receipt of the funds without disqualifying the exchange.

[Q] Does vacant land qualify as like-kind property?
[A] Yes; assuming it has been held for productive use in a trade or business, it is considered like-kind with all other types of real property.
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First American Exchange Company
800.556.2520

First American Exchange is a Qualified Intermediary and is precluded from giving tax or legal advice. You must consult with your tax or legal advisor about your specific circumstances. First American Exchange is a wholly owned entity of First American Title Insurance Company.

www.firstexchange.com

Just the Basics: Tax-Deferred Exchanges Under I.R.C. § 1031

Written By: First American Exchange Company - Jan• 05•11

Tax Reductions
Knowing some basic rules behind Internal Revenue Code 1031 can help investors defer paying capital gain tax on property dispositions, resulting in more money to invest in a property acquisition. Generally, any real or personal property can be exchanged, provided it is held “for productive use in a trade or business” or for “investment” and is exchanged for property of “like-kind” that will also be held for one of these same purposes.

Exchange of Property
The first requirement of a 1031 exchange is that the transaction must be structured as an exchange, rather than as a sale and purchase. In order to accomplish this, a Qualified Intermediary (QI) must be involved with the sale of the relinquished property (property sold) and acquisition of the replacement property (property acquired). To ensure that the transaction is considered an exchange, rather than a sale followed by a purchase, the investor must sign an exchange agreement, assignment of the purchase contract, as well as other documentation before the relinquished property sells, and the QI must hold the proceeds until they are used to buy the replacement property. As long as the appropriate documentation is signed, the QI does not need to take title to the property.

Like Kind Requirement
The replacement property must be considered “like-kind” to the relinquished property. The like-kind requirement is fairly broad for real property exchanges. For example, an office building can be exchanged for vacant land, an apartment building can be exchanged for a single family rental home, or a duplex can be exchanged for a retail strip center; basically any real property held for investment qualifies as like-kind.

Same Taxpayer Rule
In order to qualify for tax-deferral treatment, the same Taxpayer selling the relinquished property must purchase the replacement property. For example, if Company B sells the relinquished property, Company B must also acquire the replacement property. An exception to this requirement is entities that are considered disregarded for tax purposes, such as single member limited liability companies and revocable trusts. For example, Sue Smith may own a commercial building in her own name. She can sell that property and acquire replacement property in her own name, or she may take title in the name of a limited liability company in which she is the sole member, or she may create a revocable trust and take title in the name of the trust. In each case Sue Smith is still considered the same Taxpayer thus allowing her to complete an exchange.

Holding for Investment Purposes
Both the relinquished and replacement properties must be held for investment purposes or for use in the Taxpayer’s business. Property that is held for the purpose of appreciation or for rental income should satisfy the investment requirement. Typical exchange transactions involve an office or commercial building, a rental home or an apartment building. Personal residences, vacation homes frequently used by the owner, and property held for sale (i.e., new homes constructed by a homebuilder) would not qualify. Mixed use properties such as home offices or duplexes in which the investor lives in one unit and rents the other unit can qualify for a tax-deferred exchange for the portion of the property used for business or investment purposes.

The tax code does not clearly specify a minimum time frame that an investor must continue to hold the investment property to qualify for tax-deferral treatment. However, when the IRS examines exchange transactions, the Taxpayer must be able to show that the Taxpayer intended to hold the property for investment purposes at the time it was acquired. If a Taxpayer only holds his replacement property for a few months prior to selling it, the IRS may question whether the investor actually intended to hold the property for investment purposes.
Deferring All Tax
In order to defer all tax completely, the property that the investor is purchasing must be equal or greater in value, equity, and debt (but the debt can be replaced with cash) than the relinquished property. If any of these criteria are not met, the exchange may still be valid; however the transaction will likely be at least partially taxable.
Timing and Identification
The Taxpayer has 45 days from the closing of the relinquished property to identify replacement property. Proper identification of replacement property is a requirement for a valid exchange, and the investor can only acquire property which has been properly identified during the 45-day identification period. Replacement property that is acquired (i.e., closes) within the 45-day time period is considered properly identified. For property not purchased within the 45-day time frame, the identification must unambiguously describe the property (with an address or legal description), and must be made in writing, signed by the Taxpayer and sent before midnight of the 45th day. If multiple relinquished properties are grouped together in one exchange, the 45-day time period starts to run as of the closing of the first property. At First American Exchange, we provide you with forms to help you meet the required guidelines.

If a Taxpayer wants to identify more than one replacement property, there are several options. The two most common methods to identify multiple properties are:
1. The “Three Property” rule: the investor may identify up to three properties without regard to their fair market value; or
2. The “200%” rule: the Taxpayer may identify any number of properties so long as the total fair market value of all of the listed properties does not exceed 200% of the value of the relinquished property.
Once escrow closes on the relinquished property, the Taxpayer has the lesser of 180 days from the date of closing, or the date on which the Taxpayer’s tax return for the year the relinquished property was sold is due, to close the purchase transaction and complete the exchange. For exchanges closing in the final quarter of the year, the Taxpayer will need to get an extension to file his tax return to get the full 180 days.

Trust the Experts
Tax-deferred exchanges are an incredible investment tool. When considering a tax-deferred exchange, consult with your tax advisor and contact First American Exchange Company before the sale of the relinquished property. First American Exchange’s Certified Exchange Specialists® can assist you through every step of the process.
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First American Exchange Company
800.556.2520
First American Exchange is a Qualified Intermediary and is precluded from giving tax or legal advice. You must consult with your tax or legal advisor about your specific circumstances. First American Exchange is a wholly owned entity of First American Title Insurance Company.
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