EXCHANGING – INCREASING YOUR PROFITS
In today’s complex world of real property investing, one
exceptional tool is overlooked.
“ SECTION 1031 TAX DEFERRED EXCHANGE”
Investors generally buy and sell real property to earn a
profit, yet in more cases than not they overlook the
exchange as one of the most valuable profit making
techniques available. The advantage of the §1031 tax
deferred exchange remains one of the best reasons to
invest in real estate and possibly one of the last
remaining true tax advantages.
Investors are often confused and reluctant to take
advantage of the exchange process due to the intricacies
and vague Internal Revenue Code guidelines.
Jeld-Wen 1031. an Oregon based
Intermediary; specifically created and designed to help
you successfully accomplish the goal of a tax deferred
exchange. As a dedicated intermediary company, American
Exchange Services can ease the burden of an exchange,
while eliminating some of the confusion. The end result
is a significant tax savings, combined with the ability
to leverage investment dollars. It also provides a tool
that allows investors to relocate or restructure their
investment portfolio.
THE EXCHANGE
Exchange laws are based on tax provisions dating back to
1921. Subsequent changes in the tax code, tax court
rulings, and revenue rulings have created guidelines
outlining a blue print for defensible tax deferred
exchanges.
EXCHANGE – WHY?
The overwhelming advantage of using a §1031 exchange is
deferral of taxes on capital gains. This not only saves
a significant dollar amount that would normally be
consumed in taxes, it also allows the same money to be
leveraged into new investment properties. Along with the
advantage of deferring taxes, an exchange also provides
a tool that allows you to restructure your investment
portfolio. Since capital gains taxes can deplete all of
your proceeds it is possible to have no profit and still
owe capital gains taxes. The §1031 tax deferred exchange
should be given serious consideration when moving from
one real property asset to another.
WHAT IS A DELAYED EXCHANGE?
In very simple terms, a delayed exchange is an
investment technique where you sell your property today
and reinvest in other real estate within a 180-day
period or by the end of the current tax year. By
following specific guidelines, the I.R.S. will not
consider this a sale and repurchase, but will treat the
transaction as a nontaxable event. The 1984 Tax Reform
Act has allowed delayed exchanges nationwide.
WHAT ARE THE GUIDELINES?
In order to comply with federal guidelines, the theory
of continuous investment is the basic qualifying
concept. One property must be substituted for another
without liquidating and receiving the equity of the
property traded away. If there is no actual or
constructive receipt of sale proceeds, combined with
property value and debt considerations, the capital
gains taxes will be deferred until an actual sale of the
property is consummated. You can continue to exchange
acquired properties, thereby deferring the tax
indefinitely. Upon the death of an individual investor,
the property basis is set at the current fair market
value, thereby eliminating the deferred tax altogether.
The problem that arises is achieving a method to avoid
actual or constructive receipt of any equity at the
closing of the first leg or phase I of the exchange. It
is easy to understand and track actual receipt of funds,
but constructive receipt involves the concept of income
deemed to be available or controlled by the exchanger
whether actually received or not.
In an effort to duplicate a concept deemed acceptable,
one alternative has withstood the scrutiny of the I.R.S.
That concept involves the use of an independent
Intermediary (facilitator) performing specific functions
concerning actual and constructive receipt of funds.
Typically, the Exchanger and the Intermediary
(facilitator) enter into an exchange agreement in which
the Intermediary promises to perform as the Seller and
Purchaser on Phase I and Phase II of an exchange.
Instead of the Exchanger selling his property, the
Intermediary becomes the Seller and receives the
proceeds of the sale, which completes the first leg of
the exchange. To comply with acceptable guidelines, the
Intermediary cannot have an agency or fiduciary
relationship with the Exchanger. That fact disqualifies
related parties, business relationships, your escrow
company, your CPA or tax advisor and your attorney if
their relationship with the Exchanger is fiduciary.
After the close of Relinquished Property (Phase I) the
Exchanger has 45 days to identify Replacement Property,
and 180 days from the close of the Phase I to close and
complete the purchase of the Replacement Property (Phase
II), thereby completing the exchange.
WHAT ARE THE INTERMEDIARY’S RESPONSIBILITIES
The Intermediary (Jeld-Wen 1031.) is
the third party in the exchange and assumes the
contractual responsibilities of the Exchanger. Such
actions and responsibilities are specifically set out in
the “Exchange Agreement” between Exchanger and American
Exchange Services.
Using American Exchange Services may ensure the positive
cooperation necessary to complete the exchange, as well
as to provide the possibility of our participation in
solutions to some of the complex problems that arise in
such transactions.
Jeld-Wen 1031. was formed to meet
“local”, “state”, and “national” needs of persons and
corporations desiring to take full advantage of Section
1031 of the tax code.
Fees and charges will vary depending on the type of
exchange, the complexity, timing, and equity, among
other factors. In general, there will be a one time set
up fee of $500.00 that includes one Relinquished
Property in Phase I and one Replacement Property in
Phase II.
American Exchange Services may retain interest on sale
proceeds, although it is possible to credit interest to
the exchange account. Such issues should be discussed on
an individual transaction basis.
We continue to keep abreast of the constant changes
concerning exchanging real property. American Exchange
Services stands ready to assist you in your goal of a
successful §1031 exchange.
American Exchange Services will not provide tax advice
and cannot serve as a substitute for qualified
professional advice provided to the Exchanger by their
Attorney or Tax Advisor.