David A. King, Attorney - 1031 Exchanges

David A. King, Attorney at Law

1416 Kingsley Avenue

Orange Park, FL 32073

(904) 269-6699

Tax Deferred Exchanges of Real Estate

OVERVIEW

      1. NAME.

      The technically correct name for this area of the law is: “tax deferred exchanges”. You will frequently hear it being referred to by its slang name of: “tax free exchanges”. This is incorrect and misleading because this strategy does not eliminate the tax due (hence, not tax free), it merely defers the tax to a later period. The advantages of tax deferral are:

      (1) putting the dollars to work that otherwise would be sent to the IRS, earning interest or profit; and/or

      (2) deferring the payment of the tax due until a later date when you are, hopefully, in a lower tax bracket.

      You will also hear of this strategy correctly being referred to as a “1031 exchange”. This is a reference to the specific text section of the Internal Revenue Code that authorizes the use of this strategy: Section 1031 of the Internal Revenue Code of 1986.

      You will also hear of these exchanges being referred to as a “like kind exchange”. This is a reference to one of the requirements of this strategy. Please see Section 3 below for a discussion of “like kind”.

2. WRITTEN AGREEMENT.

The Treasury Regulations accompanying Section 1031 of the Internal Revenue Code require that a written agreement with the facts, details and terms of the exchange be drafted and signed by all parties. We regularly draft and prepare “Real Estate Exchange Trust Agreements” for our Clients.

      3. WHAT IS “LIKE KIND”?

      The rules for what constitutes “like kind” in regard to exchanges of real estate are fairly loose.

      EXAMPLE: An exchange of a wheat field in Kansas for an office building in New York City would be deemed to be an exchange of “like kind” real estate.

4. SPECIAL NOTE.

It is possible to meet all of the technical requirements of Section 1031, and yet produce no tax advantage to you, the taxpayer. It is always best to have your accountant review the facts and details of your specific situation and determine if a bona fide tax benefit will exist for you after the transaction is complete.

     5. QUALIFIED INTERMEDIARY OR TRUSTEE.

     In simplest terms, a “qualified intermediary” is the “stakeholder” during the course of a Section 1031 exchange. However, the qualified intermediary has to meet certain requirements and qualifications to be eligible to be a “qualified intermediary”.

      Assuming a certain person meets all of the necessary requirements and qualifications, what makes a good qualified intermediary?

             A. It should be someone with a local office that you can meet with face-to-face, and not a stranger in a distant city.

             B. It should be someone with a stable background: they were here yesterday and they will be here tomorrow.

             C. It should be someone whom you can trust, in your community, and not a total stranger.

             D. It should be someone willing to give you help and advice. Many qualified intermediaries will do nothing more than sit on the exchange funds and can not or will not give you help and advice.

      Remember, you are entrusting them with a substantial sum of your money: the “exchange funds”.

      In recent years, many of these so called “qualified intermediary” companies disappeared in the middle of the night, without a trace, before the participants could retrieve their “exchange funds”.

      David A. King, Attorney, has acted as qualified intermediary, and trustee, in many successful Section 1031 tax deferred exchanges, for more than twenty-five(25) years.

      6. TIME PERIODS.

      Please keep in mind that there are two (2) important time periods in all Section 1031 tax deferred exchanges:

      A. The first important time period is the "identification" period. We assist our clients with correctly meeting the identification requirements and correctly calculating the forty five (45) day time period pursuant to the rules.

      B. The second important time period is the one hundred eighty (180) day "Closing" period. In some instances you are not eligible for that entire number of days; however, we know all of the rules for this calculation.

      The IRS grants no exceptions and no extensions to these 45/180 day time periods!

      These time periods apply, even if the delay was caused by another party, and you were not at fault.

      7. THE THREE (3) MOST COMMON MISTAKES IN ATTEMPTED TAX DEFERRED EXCHANGES.

      A.   Receiving the exchange funds directly, in your hands, prior to hiring a qualified intermediary and signing an “Exchange Trust Agreement”.

      B.   The person or entity that is selling the real property at the beginning of the transaction is not the exact same person or entity that is purchasing the exchange real property.

      C.   Inadvertently/unknowingly violating the “like kind” rules.

We would be pleased and honored to assist you
with your tax deferred exchange, and act as
your qualified intermediary and trustee for
the transaction.

NOTICE: To ensure compliance with Internal Revenue Service Circular 230, we are required to inform you that any federal tax advice contained in this communication is not intended to be used, and cannot be used, for the purposes of: (a) avoiding penalties under the Internal Revenue Code or (b) promoting, marketing, or recommending to any party any tax-related matter addressed herein.

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