As promised in last week's Tip on Commercial Real
Estate Transactions, this week's Tip features a more detailed discussion
of 1031 Tax Deferred Exchanges.
Tax Deferred Exchanges
handling transactions where your client is contemplating a 1031 Tax Deferred
Exchange, please keep in mind the following:
- 1031 Tax Deferred
Exchanges are governed by Section 1031 of the Internal Revenue
Code. Sometimes referred to as "Starker Exchanges"
or like-kind exchanges, a 1031 Exchange provides a method for taxpayers
to defer recognizing gain (or loss) on the sale of investment
property. This is not a tax avoidance mechanism, rather the
capital gains tax is delayed or deferred to a later date.
- In order to qualify
for a 1031 Exchange the property being sold (the "Relinquished
Property") must be investment property; that is, it must have been
held for investment or "productive use in trade or
business." Furthermore, the property being purchased (the
"Replacement Property") must also be held for investment or
productive use in trade or business. The properties involved
cannot be the taxpayer's current primary residence or current
- Once the
Relinquished Property has been sold, a disinterested third party
("Qualified Intermediary"), frequently the title company, will
maintain possession of the sale proceeds until the Replacement Property
is identified and purchased. The proceeds of the sale must go through
a Qualified Intermediary and not through the hands of the taxpayer or
his/her agents or else the proceeds will become taxable.
Furthermore, all proceeds from the original sale must be
reinvested in the Replacement Property - any cash retained by the
taxpayer becomes taxable, which is why it is generally recommended that
the Replacement Property be of equal or greater value than the
- The Replacement
Property must be identified within 45 calendar days from the date of
closing on the Relinquished Property and notice to the Qualified
Intermediary must be given by midnight on the 45th day. The Replacement
Property must be closed on within 180 business days from the date of
closing on the Relinquished Property. If two or more properties are
purchased in exchange for the original Relinquished Property, all
purchases must be closed within 180 days from the date of closing of the
Relinquished Property. Similarly, if multiple properties are being sold,
the Replacement Property must be closed on within 180 days from the date
of closing on the first of the Relinquished Properties.
- While Benchmark
Title is ready and able to serve as the Qualified Intermediary for your
clients' 1031 Tax Deferred Exchange, we recommend that anyone
contemplating a 1031 Exchange also retain a tax attorney or accountant
to ensure that the transaction qualifies for tax deferral under the
Internal Revenue Code and makes fiscal sense for the taxpayer.
Any questions can be directed to Benchmark Title at
618-239-3750. Please feel free to call or email:
Serving you from three convenient locations:
1124 Hartman Lane
Shiloh, IL 62221
Escrow Fax: 618-239-3707
Title Fax: 618-239-3757
Fax Orders: 618-310-1589
President: John Howe
318 North Main St.
Columbia, IL 62236
4215 S. State Rte 159
Glen Carbon, IL 62034
Manager: Sara Sowell
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Randi Schur is
Manager and Escrow Officer for the Columbia, IL branch. Randi joined
Benchmark in April 2003 as a policy typist and has worked her way through the
company as a title examiner, escrow processor and escrow officer (aka closer)
in our Shiloh office before being promoted to Manager of the Columbia
branch. Randi was recognized in 2006 as one of Southern Illinois'
Rising Stars by the Illinois Business Journal. She resides in O'Fallon,
IL with her daughter, Regan. Randi can be reached at 618-281-9700 or by
email at firstname.lastname@example.org.
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