This memo addresses basic issues all clients need to be aware of concerning 1031 exchanges. As exchanges under I.R.C. § 1031 (a) (1) are complicated and fact sensitive, the information contained herein should be used only for general informational purposes as each 1031 exchange is different.
A 1031 exchange is used to defer capital gains from the transfer of property. In order to qualify for 1031 deferral treatment there must be an exchange of like kind property (real or personal) which is used in trade or business or held for investment.
The exchange may be either simultaneous or deferred. Most commonly the exchanged is of the deferred variety. In the deferred exchange, a qualified inter mediating (“QI”) must be used to take possession of the funds from the sale of the property. The closing proceeds must be received directly by the QI, who holds the funds in escrow until the replacement property is to be purchased. It is imperative that the taxpayer never hold these monies.
Also, two important time lines that must be complied with. First, the replacement property must be identified in writing within 45 days of the first transfer. Secondly, the purchase of the replacement property must be completed within 180 days of the original transfer. Both of these time limits refer to calendar days and they are not extended in the event the last day falls on a holiday or the weekend.
These are just some of the basics. Some other issues to be aware of are:
In order to avoid taxable boot, the value of the replacement property(s) must be at least the amount of the gain from the original transfer, plus the amount of debt relief from that sale (the payoffs of any loans encumbering that property).
The Georgia Shocker – Although Georgia’s tax scheme in many ways mimics the federal regulations, Georgia does not recognize a 1031 deferral as to state capital gains tax if the replacement property is not within the State of Georgia.
The general rule is that the tax payer has 180 days to complete the exchange. The exception to that rule is if the tax payer’s tax return is due prior to the expiration of the 180 day period, then the exchange must be completed prior to the due date of the tax payer’s return. The simple way to avoid this problem is to file an extension for the tax return.
These are just a few of the issues involved in 1031 exchanges. If we can assist you in planning a 1031 exchange, please do not hesitate to call on us.