TAX-DEFERRED EXCHANGES:
YOUR GUIDE TO SECTION 1031
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Ever wanted to know...
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What type of properties qualify for 1031 Exchange benefits?
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What are general prohibitions in a 1031 Tax Deferred Exchange?
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What is a Reverse Exchange?
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What is a Build to Suit Exchange?
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What are the cautions in a 1031 Exchange?
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What's the best way to choose a Qualified Intermediary?
An Excerpt from the Introduction:
Changes to the tax code over the years have eliminated almost every opportunity for avoiding the imposition of capital gains taxes. Tax-deferred exchanges are virtually the last legal method allowing taxpayers to defer capital gains on the sale of investment or business property, and are both widely used and widely abused. Statewide Title Exchange Corporation (STEC) has provided assistance to thousands of taxpayers taking advantage of tax-deferred exchanges to maximize gain on the sale of investment or business property. This booklet is an introduction to Section 1031 of the tax code and can be used as a guide when you talk to a tax professional about whether your circumstances qualify for an exchange.
Section 1031 of the Internal Revenue Code permits deferral of capital gains taxes on the sale of investment or business property if proceeds from that sale are reinvested in another property that is like-kind to the property that was sold. If the exchange follows the requirements of Section 1031, the taxpayer does not have to pay capital gains taxes until the new property is sold sometime in the future (if at all). These exchanges go by a variety of names – 1031, tax-free, tax-deferred, and Starker are the most common. They are most accurately called tax-deferred, because the tax obligation becomes due when the replacement property is sold instead of being avoided altogether (although taxes can be avoided altogether if the replacement property is still held at the time of the taxpayer's death.)
Most exchanges are not simultaneous; that is, the taxpayer does not sell his or her property to the same person from whom the taxpayer buys new property. The vast majority of exchanges instead include a non-party professional who is a Qualified Intermediary (QI). Intermediaries help ensure that the transaction is structured in such a way that it complies with the requirements of Section 1031 and other related sections of the tax code.
"WASHINGTON STATE LAW, RCW 19.310.040, REQUIRES AN EXCHANGE FACILITATOR TO EITHER MAINTAIN A FIDELITY BOND IN AN AMOUNT OF NOT LESS THAN ONE MILLION DOLLARS THAT PROTECTS CLIENTS AGAINST LOSSES CAUSED BY CRIMINAL ACTS OF THE EXCHANGE FACILITATOR, OR TO HOLD ALL CLIENT FUNDS IN A QUALIFIED ESCROW ACCOUNT OR QUALIFIED TRUST THAT REQUIRES YOUR CONSENT FOR WITHDRAWALS. ALL EXCHANGE FUNDS MUST BE DEPOSITED IN A SEPARATELY IDENTIFIED ACCOUNT USING YOUR TAX IDENTIFICATION NUMBER. YOU MUST RECEIVE WRITTEN NOTIFICATION OF HOW YOUR EXCHANGE FUNDS HAVE BEEN DEPOSITED. YOUR EXCHANGE FACILITATOR IS REQUIRED TO PROVIDE YOU WITH WRITTEN DIRECTIONS OF HOW TO INDEPENDENTLY VERIFY THE DEPOSIT OF THE EXCHANGE FUNDS. EXCHANGE FACILITATION SERVICES ARE NOT REGULATED BY ANY AGENCY OF THE STATE OF WASHINGTON OR OF THE UNITED STATES GOVERNMENT. IT IS YOUR RESPONSIBIITY TO DETERMINE THAT YOUR EXCHANGE FUNDS WILL BE HELD IN A SAFE MANNER." RCW 19.310.040(1)(b) (as amended)
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