22A — March 11 - 24, 2016 — 1031 Exchange — M id A tlantic
Real Estate Journal
www.marejournal.com
1031 E xchange
tax deferred asset ex- change, also referred to as a like-kind ex- By John V. Maggi, Congress Asset Exchange The advantages of tax-deferred asset exchanges - forward and reverse exchange strategies A have been used extensively in the real estate industry since the early 1990’s and The forward exchange is the most common type of exchange and involves first
properties being exchanged does not have to be the same. Settlement must be made on the new property within 180 days of selling the old prop- erty, or by the taxpayer’s tax return date with extensions, if earlier. In order to defer income taxes on the gains it is extremely important for sellers to not have “construc- tive receipt” of cash – this includes avoiding directly receiving any cash from a buyer of their old property - a qualified intermediary (QI) should be engaged prior to any sale and any cash transactions to handle the
necessary funds transfers. Exchange transactions are often complicated by the timing differentials of the parties involved and by the normal complexities sur- rounding real estate and as- set transactions. Many times a taxpayer must acquire new property before the sale of the old property can be ac- complished. Reverse Exchanges: In this case, the reverse ex- change is a useful approach that allows greater flexibility in the timing and funding of exchange transactions. These reverse transactions allow the taxpayer to first obtain the use of their new property and then later dis- pose of their old property. De- pending on how the reverse exchange is structured, there may or may not be exchange related limitations on the timing of the purchase and sale transactions. These potential timing constraints may be critical in situations where, for instance, the tax- payer may possibly need more than 180 days to sell their old property or desires to make improvements and/ or modifications to their new property prior to complet- ing an exchange. Addition- ally, for a reverse exchange to effectively defer income taxes on capital gains, the taxpayer must use a properly structured special purpose entity (SPE) that is indepen- dent of the taxpayer. From a practical perspective, the exchange process can take several years to accomplish and may also have additional cash flow and financial re- porting benefits. Also, to ensure the maxi- mum safety of all exchange related cash, it is advisable that it be held in a dedicated escrow/trust account at a reliable financial institution separate and apart from the financial institution’s own assets. The key to any successful exchange strategy is inde- pendence with valid business purpose – That is, the greater the independence between the taxpayer, QI, financial institution, SPE, etc., cou- pled with transactions that make business sense, the better the exchange. John Maggi is the presi- dent of Congress Asset Exchange. n
change o r 1 0 3 1 e x - change, can be a valu- able part of a company’s or individ- ual’s asset s t r a t e g y . They allow
“Exchange transactions are often complicated by the timing differentials of the parties involved and by the normal complexities surrounding real estate and asset transactions.”
have been part of the U.S. tax code since the 1920’s. They should be considered anytime a property transac- tion is planned. We will discuss two types of exchanges - forward and reverse exchanges. Forward Exchanges:
selling the old property and then identifying new prop- erty to buy within 45 days of the date of the old property sale. Properties that are ex- changed must be of a like kind, which for real estate is broadly defined - and the use and/or quality of the
John Maggi
for the deferral of income tax liabilities associated with the gain on the sale of real prop- erty or assets used in a trade or business or held for invest- ment purposes. Exchanges
www.congressassetexchange.com
1031 like-kind exchange Qualified Intermediary services and like-kind exchange strategies
Wilmington Trust provides escrow depository services that support 1031 like-kind exchange services
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