Charlotte NC Real Estate - Your Charlotte Real Estate Agent Rick Waite
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Rick Waite

1031Tax Deferred Exchange

The 1031 Exchange is one of the best tax benefits for the Charlotte Real Estate Investor.  The 1031 delayed exchange is utilized when there is a time delay between the sale of the relinquished property and the purchase of the replacement property (there is also a "Reverse Exchange" program that allows you to purchase the new investment prior to selling the original investment property- consult an accountant to assure the proper rules are adhered).  The taxes due on the "Net Gain" is tax deferred when a "Like Property" is purchased with the proceeds.  The definition of "Like" property has a flexible definition as long as the property is purchased for investment purposes.  There are several rules that must be strictly adhered to in order for the exchange benefits to be utilized.  This is also referred to as a "Starker Exchange".

The first step is to find an intermediary to handle the financial transaction of the 1031 Deferred Exchange.  This party must be a disinterested party (not your Realtor).  Call and I will provide some possible contacts for the 1031 Starker Exchange.  There are many changes and variations of the 1031 Exchange.  For example, there is a provision that allows you to purchase a property prior of selling your initial investment property.  The delayed exchange provides investors up to 180 days to purchase replacement property once the relinquished property is sold. And, the use of a Qualified Intermediary is required to facilitate a valid delayed exchange. The delayed exchange occurs in three fundamental steps:

STEP ONE: Sale of the Relinquished Property: Before closing on the sale of the relinquished property the Exchanger retains a Qualified Intermediary(exchange company of which there are many).The intermediary prepares an exchange agreement, assignment of sale contact and closing instructions to the escrow/closing agent then, instructs the escrow/ closing agent to direct deed the relinquished property to the buyer and to deliver sale proceeds directly to the intermediary - thereby preventing the Exchanger from having actual or constructive receipt of the funds. Once the funds are delivered to the intermediary, access to the funds is restricted for the remainder of the exchange period. In short, IRC 1031 provides strict rules pertaining to the release of funds to the Exchanger even where the Exchanger decides not to proceed with the exchange.

STEP TWO: Identification of the Replacement Property: The Exchanger must identify replacement property within 45 calendar days of the close of the relinquished property. The identification is proper only if the replacement property is designated as replacement property in a written document signed by the Exchanger and hand delivered, mailed, telecopied, or otherwise sent to the person obligated to transfer the replacement property to the Exchanger (i.e. the seller of the replacement property) or to any other person involved in the exchange other than the Exchanger or a disqualified person. Three identification rules apply:

  • 3 PROPERTY RULE: Three properties no matter what the fair market value; or
  • 200 PERCENT RULE: Any number of properties as long as the aggregate fair market value does not exceed 200% (2x) of the fair market value of all the relinquished properties; or
  • 95 PERCENT RULE: Any number of properties without regard to value - provided 95% of the value of the identified properties are acquired.

STEP THREE: Purchase of Replacement Property: Within 180 calendar days from the sale of the relinquished property, or the Exchanger's tax filing date (assuming no automatic extension is applied for), whichever is earlier, the Exchanger must acquire like kind replacement property and the property acquired must be one or all of the previously "identified" replacement properties. The Exchanger again assigns the purchase and sale contract to intermediary, who purchases the replacement property with the exchange proceeds and causes the transfer of the replacement property to the Exchanger by way of a direct deed from the seller.

0 Days 45 Days 180 Days
Close of First Relinquished Property Must have Exchange Property identified Close on last Replacement Property



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