Tax deferred exchanges are authorized by Section 1031 of the Internal Revenue Code. The requirements of Section 1031 must be carefully met and when the exchange is done properly, the tax on the transaction is deferred.

Tax deferred exchanging is an investment strategy that should be considered by anyone who owns investment real estate. The IRS’s regulations make exchanging easy, inexpensive and safe. In an exchange the owner simply disposes of one property and acquires another property through of an exchange agreement and the services of a qualified intermediary such as BANKERS Escrow Corporation who helps to ensure that the exchange is structured properly.

Specific Requirements for a valid exchange:

Qualified Property - Real Estate for Real Estate, Personal Property for Personal.

Property Purpose Requirement - Real Estate or Personal Property must be for productive use in a trade or business or for investment.

Like-Kind Requirement - All real property is like kind. One cannot exchange personal property for real property.

Holding Requirement - no holding period is specifically defined in 1031 regulations although a rough rule of thumb is a two year period or more. The holding period is considered in determining whether the Purpose Requirement has been met. For example, if a replacement property is acquired and immediately sold, that might indicate the property was acquired for resale and is therefore dealer property and cannot qualify for tax deferred treatment.

Exchange Requirement - an exchange must take place in which one property is exchanged for another.

Time Limits & Identification Requirement - A taxpayer is required to identify the target property within 45 days after the transfer of the relinquished property. Property must be designated in a written document, unambiguously described, signed by the taxpayer & hand delivered, mailed, sent via fax or otherwise sent on or before the 45th day to BANKERS Escrow Corporation. In addition, the taxpayer must close on the replacement property(ies) within 180 days of the transfer of the first relinquished property.

NO Constructive Receipt of Exchange Funds - If the taxpayer receives any exchange funds, that portion will be taxable. A person is allowed to do a partial 1031 exchange.

Use of a Qualified Intermediary - An unrelated third party such as BANKERS Escrow Corporation is used to transfer property or money while protecting the taxpayer from constructive receipts & agency issues. A taxpayer cannot utilize their realtor, lawyer, accountant or related party as a qualified intermediary.