1031 Wealth

It is obvious that in a simultaneous exchange the transfers occur at the same time and that in a deferred exchange they do not. The problem you will need to face is that no one knows, nor does the government tell us when a transaction is simultaneous and when it is not! Are we talking about minutes between recordation, hours or maybe more than a few hours? A simultaneous exchange presumably does not need any of the “safe harbors”. A deferred exchange obviously does, but how does one tell the difference? It may sound self serving, but to be safe from the Internal Revenue Service, it seems advisable to use the services of someone with years of experience in Section 1031 real estate exchanges, rather then risk an audit based upon the “doctrine of constructive receipt”.

First Nationwide employees not only have had years of experience but will be delighted to share their expertise in assisting you to maximize the benefits to be derived from your exchange.

There are times when an opportunity arises to acquire replacement property prior to the sale of the relinquished property. This type of transaction did not qualify for tax deferment under the previous rules of Section 1031. Effective September 15, 2000 the Service provided safe harbor guidelines permitting “reverse” exchanges and other “parking or warehousing” arrangements. These guidelines require the same 45 and 180 day time limits as a straight exchange. In addition, the Service requires that the titleholder of the replacement property and the exchanger agree in writing that 1. The titleholder is holding the replacement property for the benefit of the exchanger, 2. All parties to the transaction are subject to taxation, 3. All parties agree to report the transaction to the Service in compliance with these guidelines, and 4. The titleholder will be treated as a beneficial owner at all times. This safe harbor applies only where there is a genuine intent to accomplish a Section 1031 exchange and provides that the titleholder of either the replacement or relinquished property will be treated as the owner of the property for tax purposes and will not challenge the qualification of either the relinquished or the replacement property.

The new guidelines specifically do not disallow existing “parking” arrangements entered into either before or after the effective date of the guidelines. So it appears that whether one enters into a “parking” arrangement and whether the 5 day agreement between the parties, the 45 day identification and the 180 closing are adhered to, the important criteria is that all parties be tax paying entities, that the titleholder of property actually hold title with all the burdens and benefits ownership. The titleholder must satisfy the requirements of a qualified intermediary, may receive a loan from the exchanger to finance the acquisition of the property, may lease the property and may hire or otherwise manage, improve or act as a contractor in regards to the property.

When a taxpayer disposes of rental property planning to acquire vacant land with the intent to build a new structure for rental purposes, he or she is often faced with the dilemma that the cost of the vacant land is often less that the price of the old rental property. Even though the cost of the entire package, when complete, may qualify, the cost of the labor and material for the new structure is either personal property or personal services, neither of which qualify as like-kind with real property. If this should be the position in which you find yourself, we can arrange a construction exchange for you. In a construction exchange a Limited Liability Company “LLC” (which is not a disqualified person) will acquire the vacant land for you using the proceeds from the sale of the relinquished property. It will enter into a contract with the builder of your choice and complete the construction in compliance with the plans you have chosen. You, of course, will be responsible for all aspects of construction, including permits, zoning and supervision. The builder will send all bills to the LLC which will pay those bills with money obtained from us using proceeds from the sale of the relinquished property. Very careful planning is needed, so that the finished product will be completed within the 180 day exchanger period and that the funds held by First Nationwide Exchange are not exhausted prior to the completion of the structure, or else arrangements are made to supplement those funds with funds from the builder or owner. Not later than the 180 day, the LLC will deed the property to complete the exchange.