8824 Like Kind Exchange

[S T]

More info on 1031 Exchanges

Brian I found this info at http://www.1031cpas.com/1031%20literature.htm

A Simultaneous Exchange is an exchange in which the closing of the relinquished property and the replacement property occur on the same day, usually back-to-back. There is no interval of time between the two closings. This type of exchange is covered by the Safe Harbor Regulations.

The role of the Qualified Intermediary is essential to completing a successful and valid delayed exchange. The Qualified Intermediary is the glue that puts the buyer and seller of property together into the form of a 1031 Exchange. Where such an intermediary (often called an exchange facilitator) is used, the intermediary will not be considered the agent of the taxpayer for constructive receipt purposes notwithstanding the fact that he may be an agent under state law and the taxpayer may gain immediate possession of the money or property under the laws of agency.

In order to take advantage of the qualified intermediary "safe harbor" there must be a written agreement between the taxpayer and intermediary expressly limiting the taxpayer's rights to receive, pledge, borrow or otherwise obtain the benefits of the money or property held by the intermediary.

A qualified intermediary is formally defined as a person who is not the taxpayer or a disqualified person who enters into a written agreement (the "exchange agreement") with the taxpayer and, as required by the exchange agreement, acquires the relinquished property from the taxpayer, transfers the relinquished property, acquires the replacement property, and transfers the replacement property to the taxpayer. The qualified intermediary does not actually have to receive and transfer title as long as the legal fiction is maintained.

The intermediary can act with respect to the property as the agent of any party to the transaction and further, an intermediary is treated as entering into an agreement if the rights of a party to the agreement are assigned to the intermediary and all parties to the agreement are notified in writing of the assignment on or before the date of the relevant transfer of property. This provision allows a taxpayer to enter into an agreement for the transfer of the relinquished property (i.e., a contract of sale on the property) and thereafter to assign his rights in that agreement to the intermediary. Providing all parties to the agreement are notified in writing of the assignment on or before the date of the transfer of the relinquished property, the intermediary is treated as having entered into the agreement and, upon completion of the transfer, as having acquired and transferred the relinquished property.

There are no licensing requirements for Intermediaries. They need merely be not an unqualified person as defined by the Internal Revenue Code in order to be qualified. The Code prohibits certain "agents" of the taxpayer from being qualified. Accountants, attorneys and realtors who have served taxpayers in their professional capacities within the prior two years are disqualified from serving as a Qualified Intermediary for a taxpayer in an exchange

So would one of the escrow companies qualify as the "Facilitator" and was there a written agreement to qualify for the Safe Harbor rule on simultaneous transactions?

Sandy

[Brian EA]

Brian I found this info at http://www.1031cpas.com/1031%20literature.htm



So would one of the escrow companies qualify as the "Facilitator" and was there a written agreement to qualify for the Safe Harbor rule on simultaneous transactions?

Sandy

As far as I am aware there was no written agreement made. The escrow companies may or may not qualify as the Facilitator..

Thanks for the info Sandy. Very interesting.

[veritas]

Sounds like a valid exchange now that the client has given you all the facts.

[Brian EA]

Sounds like a valid exchange now that the client has given you all the facts.

I dont think so but I may be wrong. There was no written agreement. He just thought that he could defer the gain.
I dont think the closing agents even knew about the 1031 exchange for this particular situation.

[S T]

1031 Exchanges

Brian, I have been involved in a few 1031 exchanges.

I was always advised that when you sold the property that you are giving up and the real estate contract was drawn up that somewhere in the contract the seller should state that the property is subject to 1031 exchange. Same on the purchase, that you are purchasing subject to 1031 exchange.

Anything that is listed within the real estate contract then becomes part of escrow instructions and closing.

You might have the t/p furnish you with the contracts for sale and purchase.

Sandy

[Brian EA]

Thanks Sandy. I will look into it.

[jainen]

I disagree

>>The first closing agent then gave the proceeds to the second closing agent.<<

This may very well qualify as a 1031 exchange. Using a qualified intermediary is only a safe harbor; it is NOT required by law or the IRS. I wouldn't try to second-guess the tax attorney, who I presume reviewed the transaction in detail.

[S T]

Tax Attorney

Unfortunately, I do second guess attorneys, as sometimes they create more tax problems than solve them. And I do not believe in this case that the Tax Attorney is preparing or signing the tax return.

so here is some more info, and yes Jainen you could very well be right on one closing agent to the next closing agent without the QI. But Brian, is going to need to do some investigating to make sure that all falls in line within 1031 exchange rules.

In Brian's case it would be really nice, if the t/p had outlined his intentions of this transaction within the real estate documents for selling and purchasing. At least that would establish intent on completing a 1031.

The exchange ends the moment the taxpayer has actual or constructive receipt (i.e. direct or indirect use or control) of the proceeds from the sale of the relinquished property. The use of a QI is a safe harbor established by the Treasury Regulations. If the taxpayer meets the requirements of this safe harbor, the IRS will not consider the taxpayer to be in receipt of the funds. The sale proceeds go directly to the QI, who holds them until they are needed to acquire the replacement property. The QI then delivers the funds directly to the closing agent.

Yes one escrow to the next escrow, but wouldn't it be nice if there were also a reference to a 1031 exchange within escrows to really establish the Safe Harbor.

I for one would not want to try an exchange that way. I am up for paying the $750-$1000 to QI to make sure I qualify for the 1031.

Sandy

[jainen]

the ones who don't

>>At least that would establish intent on completing a 1031<<

Usually we say that intent is important, with the concept of "substance over form." That doesn't apply to Section 1031. What you intended is irrelevant. The only thing that matters is what actually happened.

It used to be common to include the exchange in the sales contract, something like "buyer agrees to cooperate in a 1031 exchange." Such a provision is too vague and unenforceable, and therefore is of no value in determining what actually happened. The problem is that the buyer might balk when he is given deeds to other properties on a temporary basis. He agreed to cooperate, but never agreed to go on chain of title to properties he wasn't interested in! That gave rise to the professional intermediary, one of several methods IRS adopted as safe harbors.

Attoneys have no worse record on tax issues than CPA's. You can count on the ones who specialize in tax work, you can't on the ones who don't.

[Bees Knees]

Control is key. The reason a contract needs to be drawn up before the transaction is that the taxpayer no longer has control over the funds at closing.

For example: Say no contract was signed. They get to closing and the first closing agent withholds the funds while the second transaction is in progress. All of a sudden, the TP changes his mind and says "Wait!. I changed my mind. I just want my money and forget about buying the second property."

The TP still has controll over the money, so it is as if he was touching the cash. No 1031 allowed even if he does decide to go through with the transaction.

In MN, I believe you have 3 days to back out of a house closing after the fact. If you are doing a 1031 exchange, the contracts would need to be signed at least 3 days prior to the exchange in order to take away the TPs ability to control the funds and back out during or after the exchange.

[veritas]

I agree with the Bees. I read a case where the 1031 failed because the taxpayer instructed the escrow company to fund the simultaneous purchase of another property. He had control so no 1031.

[jainen]

Control is not really the issue

Control is not really the issue. An exchangor can give instructions to an intermediary and the intermediary is required to follow them. The way the transaction is structured is at the heart of Section 1031. It must be a true exchange between two parties, not a reinvestment. The exchangor can control funds as long as there is no constructive receipt.

[Brian EA]

Now For The Kicker.

The client finally brought in the Hud Statements.

The rental house was sold for $258000. The purchase price for the rental condo is $220000.

What a bummer.He came out ahead which disqualifies him for the 1031 exchange.He has boot in his pocket

Anyway THANKS GUYS. IT WAS A GREAT THREAD . This has been a Tax issue that made Taxes more Taxing.

[jainen]

I still disagree

>>He came out ahead which disqualifies him for the 1031 exchange<<

Taking boot does NOT disqualify him from a 1031 exchange. Trading down is one of the most important uses for exchanging. He could still defer tax on $220,000.

[Bees Knees]

Control is not really the issue. An exchangor can give instructions to an intermediary and the intermediary is required to follow them. The way the transaction is structured is at the heart of Section 1031. It must be a true exchange between two parties, not a reinvestment. The exchangor can control funds as long as there is no constructive receipt.

Control IS key in that there is a binding contract for the exchange to happen prior to the exchange. The exchangor cannot just decide to cancel the deal without suffering some kind of breach of contract issue. Obviously, anyone can break a contract that is a valid 1031 exchange and decide to back out at the last minute. But what are the consequences? If there are no consequences because the exchangor controls the deal, then there is no 1031 exchange.