What is a tax-deferred exchange, also known as a 1031 exchange?
In a typical transaction, a property owner is taxed on any gain realized from the sale of their property. However, in a IRS Section 1031 tax-deferred exchange, the tax on the gain is deferred until a future date.
Internal Revenue Code Section 1031 provides that no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business, or for investment. A tax-deferred exchange is a method by which a property owner trades a “relinquished” property for a new “replacement” property. So long as the new replacement property is of “like-kind” to the relinquished property, tax on the gain will be deferred.
The Role Of Qualified Intermediary
In theory, a tax-deferred 1031 exchange is quite simple, however, there are many nuances, requirements, and potential pitfalls involved. Hence, it is recommended that you use a qualified intermediary if you intend to take advantage of a tax-deferred exchange. To assist in a tax-deferred exchange, this firm has a wholly-owned subsidiary to act as a qualified intermediary in cases when appropriate. In other circumstances, we have relationships with third party qualified intermediaries who can fill that role. In this manner, you can be certain that qualified and experienced persons are assisting you in your tax-deferred exchange.
The 1031 exchange business has become somewhat of a commodity in the past few years. Everyone from banks to title insurance companies to real estate brokerages have entered the business.
Most of these entities offer a competent service, but without any thought to planning for or recognition of the subtleties of a transaction. In point of fact, they are careful to state that they are not offering legal advice and shy away from any advice at all. The result is that taxpayers unwittingly miss opportunities and take unnecessary risks. Our philosophy has been to offer competent, experienced advice and to look for pitfalls in a transaction.
All funds and exchanges on which we act as advisors are deposited into separate accounts. Funds are never commingled. Our clients have never lost a penny as a result of our handling of funds. We make a full accounting of funds received and the appropriate disposition.
Although there can be no guarantee, our exchanges have, to our knowledge, never been successfully challenged on audit. In fact, a number of our exchanges have successfully withstood audit. Exchange rules are deceptively simple, but can be very complex to apply in the real world. We are proud of our record in this area.
Spierer, Woodward, Corbalis & Goldberg is able to assist in all aspects of personal, commercial and industrial real estate transactions. Find out more about our practice in Real Estate Law.
Get in touch with us to discuss facilitating a tax-deferred 1031 exchange.