Why a Tax Deferred Exchange?
An IRC Section Tax Deferred Exchange is the only way for business owners or investors to defer capital gains tax when selling eligible properties. Because of the complexity and strict qualifying rules of these transactions, many investors have avoided tax-deferred exchanges. However, with the assistance of a Qualified Intermediary such as Ainsley Exchange Services, Inc. these complexities are simplified. By deferring the tax due on sales, the tax payer can use future dollars to pay his tax bill.

How is the Exchange Successfully Accomplished?
There are two types of qualified exchanges - simultaneous and delayed. Simultaneous exchanges require that the sale of the old property and the purchase of the new property close escrow on the same day. The tax payer (exchangor) must not have actual or constructive receipt or access to the funds in order to successfully defer capital gains tax.

However, as investors know, the complexity of those transactions rarely allows as "same day" closing. To address the delayed acquisition of the replacement property, the IRS has approved delayed exchanges provided that the taxpayer works with a Qualified Intermediary such as Ainsley Exchange Services, Inc. Before the closing of the sale of the old property , the taxpayer assigns his interest in the sales contract to the Intermediary. When the property sale closes, the Intermediary retains the proceeds. Once the taxpayer finds a replacement property, the Intermediary uses those proceeds to acquire the replacement property. The taxpayer never has actual or constructive receipt or access to those funds, thereby qualifying for capital gaines tax deferral.

What are the Timelines for my Exchange?
Dates are critical in tax deferred exchanges. You have 45 days from the closing date of your old property to identify in writing the potential new property/s you plan to purchase. Within the earlier of 180 days of your closing or when your income taxes are due on the sale you must close on your new property/s. Please note that the IRS allows NO exceptions. If your 45th or 180th day falls on a weekend or holiday, you must identify or close before in order to retain you tax deferred status.

May I Provide Seller Financing on My Old Property?
You may provide the financing, but the Intermediary must be the beneficiary of the note and the deed of trust. Prior to the acquisition of the replacement property, the note and deed of trust must be purchased from the Intermediary to generate the liquid proceeds. Alternatively, the seller of the replacement property may accept the note and deed of trust as full or partial payment.

May I identify and Purchase More Than One Property?
The rules allow you to identify up to three potential replacement properties of any value. If you identify more than three properties, the total value of the identified properties generally cannot exceed 200 percent of the selling price of the relinquished property. The properties must be identified unambiguously in a written document. You may acquire more than one parcel with your proceeds.

Must I reinvest All of the Proceeds from the Sale?
To defer the entire taxable gain on the sale, you must reinvest all of the equity of the relinquished property and maintain at least the same level of debt. You may replace some of the debt with and additional cash investment, however you may not replace the equity with additional debt. If you receive a distribution of a portion of the cash proceeds or your debt amount is reduced, then you may be considered to have received "boot" on the transaction. You will then have to report the gain on the sale to the extent of the "boot" received.

Can I Plan an Improvement Project for My New Property?
You may identify a potential replacement property which is not in existence or being produced at the time the property is identified. The improvement must be completed before the replacement property is received by the taxpayer. To the extent the improvements are not completed by the time of the acquisition, then only the portion installed or affixed to the property will be considered real property that satisfies the requirements of Section 1031

The IRS has strict rules for 1031 transactions. These answers may not apply to your unique situation. Please call our office for more details. We will be happy to further explain the legalities of these transactions and the regulations which may apply in your particular situation.