Arpple, Inc. acts as a qualified intermediary, responding to both simultaneous and delayed transactions. Utilizing “ Safe Harbors” and other security instruments, the Arpple, Inc. team ensures the most reliable, efficient processing, with complete documentation. Arpple, Inc. is prepared to meet both local and nationwide deadlines. Arpple, Inc. is a member of the Federation of Exchange Accommodators and has a Certified Exchange Specialist on staff.
Tips and Tools for 1031 Exchanges
Basic Rules to Remember to Qualify for a Complete Tax Deferral
- Receive only “like-kind” replacement property
- Use all proceeds from the relinquished property for purchasing the replacement property.
- Make sure the debt on the replacement property is equal to or greater that the debt on the relinquished property (exception: A reduction in debt can be offset with additional cash; however, a reduction in equity cannot be offset by increasing debt.)
- Do not dissolve partnerships of change the manner of holding title during the exchange. A change in Exchanger’s legal relationship with the property may jeopardize the exchange.
- Failure to identify within the 45 day identification period or failure to acquire replacement property within the 180 day exchange period will disqualify the entire exchange.
Suggested Wording for your Purchase Contracts
On Relinquished Property
It is the intention of the Seller to effect a tax-deferred exchange in conformance with Section 1031 of the Internal Revenue Code. Seller may assign his/her rights in this contract to a Qualified Intermediary for the purpose of effecting such exchange. Buyer agrees to cooperate and execute necessary documents to allow Seller to effect such exchange; however, any warranties that may be expressed in this contract shall remain and be enforceable between the parties executing this document.
On Replacement Property
It is the intention of the buyer to effect a tax-deferred exchange in conformance with Section 1031 of the Internal Revenue Code. Buyer may assign his/her rights in this contract to a Qualified Intermediary for the purpose of effecting such exchange. Seller agrees to cooperate and execute necessary documents to allow Buyer to effect such exchange; however, any warranties that may be expressed in this contract shall remain and be enforceable between the parties executing this document.
“Safe Harbors” in 1031 Exchanges
- Use A Qualified Intermediary
- Must have an Exchange Agreement
- Taxpayer must assign rights in any purchase contracts
- Exchange Credits under 45 and 180 day time restraints
- May be used in a simultaneous exchange
- Use of a Letter of Credit
- Taxpayer’s rights “protected” in event of a default by Intermediary
- Requires written agreement with Escrow or Bank depository
Critical Timing * Identification
DO NOT miss your identification and exchange deadlines. Failure to identify within the 45 day identification period or failure to acquire replacement property within the 180 day exchange period will disqualify the entire exchange.
IDENTIFICATION PERIOD- Period during which the Taxpayer must identify (and/or receive) the Replacement Property. Period begins the date the Relinquished Property is transferred and ends at midnight the 45 th day thereafter. No extensions are given for holidays or weekends.
EXCHANGE PERIOD- Period during which the Taxpayer must receive one or all of the Replacement Properties identified. Period begins the date the Relinquished Property is transferred and ends at midnight of the earlier of the 180 th day thereafter, or the due date (including extensions) of the Taxpayer’s return for the taxable year in which the transfer of the Relinquished Property occurs. No extensions given for holidays or weekends.
METHOD OF IDENTIFICATION- Must be in writing, signed by Taxpayer, and delivered by hand, by mail, telecopied, or otherwise sent before the end of the Identification Period. Must be delivered to (i) person obligated to transfer Replacement Property, (ii) any other person involved in the exchange other that the Taxpayer or disqualified person.
Timing is of the utmost importance. Be sure to calendar your 45th and 180th days from transfer of the Relinquished Property.
Terms Used in 1031 Exchanges
Like-Kind Property- Any real estate property held for investment purposes exchanged for any other type of real estate property for investment (e.g. vacant land can be exchanged for an apartment complex.) Your personal residence, in most cases is not Like-Kind investment property.
Exchanging Up- The rule of thumb used to accomplish a fully tax-deferred exchange is: Up in Value and Up in Mortgage
(also referred to as the “napkin test”.)
Boot- If you do not exchange even or up in value and/or exchange even or up in equity and debt, you will receive non qualifying property (“boot”). If boot is received, tax is computed on the amount of gain on the sale or the amount of boot received, whichever is lower.
Relinquished Property- Property which Taxpayer now owns and wishes to dispose of by exchanging (formerly referred to as “downleg” property- “first” property- “sale out” property)
Replacement Property- Property that Taxpayer is acquiring in the exchange (formerly referred to as “upleg” property- “second” property- “target” property)
Deferred Exchange- A transaction in which Taxpayer first transfers Relinquished Property and at a later day receives Replacement Property (formerly “Starker” or “Delayed Exchange”)
Simultaneous Exchange- A transaction in which the Taxpayer transfers the Relinquished Property and simultaneously receives the Replacement Property at the same instant (formerly known as a “Concurrent Exchange”)
Qualified Intermediary- A person or entity who is not the Taxpayer, or a “disqualified person”, and who enters into a written exchange agreement with the Taxpayer, and as required by the exchange agreement, acquires and further transfers the Relinquished Property and acquires and transfers the Replacement Property to the Taxpayer (formerly referred to as “accommodator”, “facilitator”, “strawman”, “conduit”)
Disqualified Person- (i) Any corporation or partnership in which Taxpayer owns at least a 10% interest or more, (ii) person who is or has been an agent of the Taxpayer at the time of the transaction or within a 2-year period preceding the date of transfer of Relinquished Property, in the capacity of Taxpayer’s employee, attorney, accountant, investment banker or broker, or real estate agent or broker (iii) family members, (iv) other relationships defined in Section 1031 (formerly referred to as “related party”).
1031 Final Regulations - 3 Property Rule - 200% Rule - 95% Rule
The manner in which the Taxpayer designates his/her Replacement Property is critically important to accomplish his/her desired 1031 Deferred Exchange. Taxpayer must consult her/her own legal and/or tax advisor in this matter. Precise documentation and timing is of the utmost importance. IRS will be examining these aspects of the transaction in making their determinations. For example, one of the questions asked on the IRS form 8824 is the “Date the like-kind property you received was identified (month, day and year)”. The IDENTIFICATION PERIOD starts on the date the Relinquished Property is transferred and ends at midnight on the 45 th day thereafter. The count of days is by calendar days and includes Saturdays, Sundays and holidays. No extensions will be granted for Saturdays, Sundays or holidays. The Taxpayer has two choices in his/her designation as outlined below.
THREE PROPERTY RULE | 200% RULE | 95% RULE
The Taxpayer may identify up to three properties of ANY fair market value (within the identification period- midnight on the 45 th day after transfer of Relinquished Property)
200% RULE
The Taxpayer may identify any number of Replacement Properties, provided the aggregate fair market value of said properties at time of designation does not exceed 200% of the fair market value of the Relinquished Properties. In making the written identification of these Properties, the form and content of such identification is important- in addition to the unambiguous description of the properties, the fair market values of each property must be stated.
95% RULE
Failure to meet the 3-Property Rule or pass the 200% test. IRS views it as no replacement property has been identified with two exceptions:
1) If taxpayer receives qualifying replacement property during the 45-day identification period
2) If taxpayer receives replacement property during the 180 day exchange period and had identified it during the identification period, and if the value of the received property is at least 95 percent of the aggregate fair market value of ALL IDENTIFIED replacement properties.
Interstate Transactions
We at Arpple, Inc. work with escrow companies, title companies and attorneys to successfully complete 1031 exchanges throughout the United States. Please contact us for more detailed information.
If you need information regarding going forward exchanges, reverse exchanges and build-to-suit exchanges please contact us.
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