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Vision Partner Group Inc., and its many affiliates, are prepared to handle all your 1031 Tax Exchange needs. Our exclusive underwriter Stewart Title Guaranty Company has a division solely dedicated to this practice and have staffed this division with the best and the brightest to assure that, while acting as intermediary, your clients will still receive that Vision experience you deserve.

The Internal Revenue Code imposes taxes when property is sold or transferred and a gain is realized. According to Section 1031 of the tax code, if a taxpayer adheres to strict code guidelines, then all or a portion of the gains from the disposition of business or investment property can be deferred or reinvested into a new replacement property. These deferred gains, as well as the gains from the new property, are not taxed until the new property is transferred and fails to qualify for tax deferral.

To qualify for tax deferment, the taxpayer must structure the transaction as an exchange of one property for another of "like kind". Since 1921, tax-deferred or "1031" exchanges have evolved from a simple but restrictive two-party swap to today's highly strategic and sophisticated exchanges. Now possible for taxpayers large or small, 1031 exchanges can only be facilitated with the guidance and specialized services of a Qualified Intermediary, like Stewart Title's 1031 Exchange Services.

Below are some typical taxpayer questions regarding 1031 Exchanges. These FAQ's are intended to provide basic information about tax deferred exchanges, and are not a substitute for legal or financial advice. Stewart Title strongly recommends consulting with a tax or legal advisor before considering an exchange.

Why tax is "deferred" in a Section 1031 exchange?
Capital gains tax is comprised of two components: the tax due on the profit earned on the sale of the investment or income property (the profit earned is the appreciation in value of the property and is determined by gross sale price minus the adjusted basis and the cost of sale), AND the tax due on the recapture of depreciation previously taken by the taxpayer during the time the taxpayer owned the property.

Why do I need a Qualified Intermediary (QI)?
A QI provides many helpful functions during a 1031 exchange, including two that are absolutely necessary. First, the QI provides the taxpayer with the required documents to establish the taxpayer's intent to do an exchange. This paperwork creates the structure of an exchange and insures that the end result complies with the laws and rulings. Secondly, the QI acts as the accommodator for proceeds to protect the taxpayer from direct (actual) or indirect (constructive) receipt of the funds, either of which would invalidate the exchange. The use of a QI also satisfies one of the safe harbors set forth under IRC 1031.

What are the 45 day and 180 day rules?
Generally a taxpayer has 45 days from the transfer date of the relinquished property to properly identify the replacement property, and up to 180 days from the transfer date to acquire one or all of the identified properties. The 180 days after the transfer of the relinquished property, or the date of taxpayer's federal tax return (including extensions), whichever event occurs first.

Do I still need a QI if I am involved in a simultaneous exchange where more than two parties are involved and all the deeds and proceeds are transferred within minutes?
Yes. Tax law provides that all exchange structures (except a two-party direct swap) need a party separate from the transaction to receive the cash proceeds. Today, the separate party is referred to as a Qualified Intermediary.

Can I do an exchange with a relative?
Yes. A taxpayer can do a direct exchange with a related party but both taxpayer and the related party must retain their respective replacement properties for at least two years after the exchange. Exchanges involving related parties present complex issues. If this issue is important to you, please contact Stewart Title or a knowledgeable tax advisor before proceeding.

When is an exchange not appropriate?
An exchange is not appropriate when the taxpayer does not want like kind property,wants a higher depreciable basis in the replacement property or desires a substantial amount of cash.

Can real estate be exchanged for anything other than real estate?
Generally no. All real estate can be exchanged for all other real estate EXCEPT when:

The real estate is held as your primary residence or is held for personal use
The real estate is held primarily for sale or as inventory
The real estate located in the U.S. is exchanged for foreign real estate, or vice versa.
The real estate is not identified or acquired within the time frames provided in the Internal Revenue Code (IRC)

Do second homes qualify for exchange treatment?
Yes, as long as the primary purpose for the vacation home is not for personal use. If you are contemplating such an exchange, we strongly urge you to contact a knowledgeable tax advisor before proceeding.

Do real property leases qualify for Section 1931 exchange treatment?
Yes. With the requirement that leases must have at least 30 years (including unexercised options) remaining at the time of the exchange to qualify as like kind property to real estate. Unexercised options to renew can be included in the 30-year calculation.

Do the names of the replacement property and relinquished property have to be the same?
Yes. Exceptions include single member limited liability companies and grantor trusts which pass through entities for federal income tax purposes.

Can I offer an exchange to my lender in lieu of foreclosure?
Theoretically, yes, however it is still likely that there is a taxable equity. Because there are several complexities to consider, it is best to consult your CPA or tax advisor.

Are partnerships allowed to do exchanges?
Yes. All tax-paying entities are entitled to the benefits of Section 1031; however, the Code is clear that individual partners may not exchange their partnership interest for another partnership interest or for real property.

Can I finance the purchase of the relinquished property?
Yes. If the taxpayer desires to use the note to purchase the replacement property, then the note should be issued by the buyer to the Qualified Intermediary (QI). The taxpayer cannot receive any installment payments during the exchange period. The note can be used to purchase the replacement property, or the QI can sell the note to a third party. If at the end of the exchange period the note has not been sold or satisfied in full, the QI will distribute the note to the tax payer and it will be taxable boot.

When is a reverse exchange appropriate?
Your CPA or tax advisor can provide the best guidance. Some common examples of when a reverse exchange is appropriate are;

Market conditions arise where the value of replacement properties is rapidly accelerating or desirable properties are becoming less available. A reverse exchange allows you to acquire the right property before values get out of reach or the property is removed from the market.
You are ready to close on the replacement property, but the buyer of your relinquished property is unable to close on time. If you cannot extend the closing of the replacement property, then a reverse exchange may be your only option for tax deferral.
You have several relinquished properties to dispose of in order to complete a typical deferred exchange within the statutory 180 days to dispose of the remaining relinquished properties.

Can I exchange unimproved real property for improved real property?
Yes. Improved real property is like kind and can be exchanged for unimproved real property and vice versa. Real estate is like kind to real estate so long as it is held for productive use in a trade or business or for investment purposes.

If you have any questions that are not answered in the above description please do not hesitate to contact your local Vision Title office and we can handle the coordination of your 1031 Tax Exchange needs in conjunction with our partner Stewart Title