Leavenworth 1031 Tips
Michelle Rojas, Esq. VP & Northern Region Manager of LandAmerica 1031 Exchange Services
Most investors understand the tax benefit of structuring a 1031 exchange, whereby an investor trades one property for another without having to pay capital gains taxes. In an ordinary sale transaction, the investor is taxed on any gain realized by the sale of the property. But in an exchange, the tax on the transaction is deferred until some time in the future. In an exchange the investor, instead of receiving cash from the sale of his investment property, assigns his or her rights to the old relinquished property sale proceeds to a Qualified Intermediary (QI). From the date of closing the relinquished property, the QI holds the funds in a qualified exchange account while the investor must identify new replacement property within 45 days. Then, within 180 days of closing the relinquished property (Exchange Period), the QI funds the purchase of the new replacement property to complete the exchange.
In some cases, investors (taxpayers) will carry back a Note instead of cash as consideration from the buyer. However, taxpayers should be aware of the“like-kind”requirement in a 1031 exchange, meaning that a taxpayer may only receive property that is“like-kind”in nature and character to the property that was sold. Thus, a taxpayer who sells real property is only allowed to receive real property in exchange. If a taxpayer receives a Note or cash in an exchange of real property, this does not meet the like-kind requirement and the taxpayer will be liable for capital gains taxes for the Note or cash received.
If you or your client are having difficulty locating quality replacement property, consider the TIC interest. It could be just the type of product to fit your investment portfolio.
Where a taxpayer is considering financing the buyer’s purchase of the relinquished property
and the taxpayer had planned to structure a 1031 exchange, a taxpayer should consider the following options:
• The taxpayer may take back a Note for all or part of the buyer’s purchase price. The taxpayer qualifies for installment sale treatment on the Note, which in effect spreads the taxation of the gain over the life of the
• Include the Note as part of the exchange by naming the QI as payee of Note and beneficiary of deed of Trust/Mortgage.
The QI may either:
Assign the Note to the Seller of the Replacement Property as partial payment towards the purchase price;
or Sell the Note to a third party for cash, and the cash proceeds are added to the existing qualified exchange account;
or Sell the Note to the taxpayer for cash during the exchange period and use the Note proceeds towards the replacement property purchase.
If the taxpayer is unable to locate a purchaser for the Note by the end of the exchange period, the QI will assign the Note to the taxpayer and the taxpayer will be liable for any capital gains taxes due on the Note. Taxpayer qualifies for the installment sale treatment for the life of the Note.
The content is general in nature and should not be acted upon without further guidance from your tax counsel.
Compliments of LandAmerica 1031 Exchange Services
Author: Michelle Rojas, Esq. VP & Northern Region Manager of LandAmerica 1031 Exchange Services
For more details any questions about 1031 Tax Exchanges please contact:
Ann McLaren, Vice President
3905 Martin Way E, Suite A
Olympia, Washington 98506
(866) 962-1031 toll free cell
(866) 623-1031 toll free fax
(866) 379-1031 toll free 1031 Team