When setting up or completing a 1031 Exchange taxpayers need to be mindful of the rules and procedures set forth in the tax code. These are five of the common mistakes that occur:
1) Not looking for Replacement Property soon enough.
2) Not starting a 1031 Exchange in time.
3) Acquiring property from a related party.
4) Overfunding the loan on Replacement Property.
5) Using a disqualified party as a Qualified Intermediary or closing agent.
1) Not looking for Replacement Property soon enough.
The IRS requires the taxpayer to identify the Replacement Property, in writing, on or before day 45 from the closing of the old Relinquished Property. The 45 day time limit cannot be extended so it’s best to start the search for Replacement Property as soon as possible.
2) Deciding to open a 1031 Exchange after the transaction has closed.
At least once a week IPX1031 receives a call saying, “My property closed yesterday. I would like to set up a 1031 Exchange.” Sadly, if your Qualified Intermediary (a company such as IPX1031) is not involved prior to closing, a 1031 cannot be initiated. Even if the taxpayer has not cashed the check from the closing agent, the IRS will disallow the exchange because constructive receipt of the funds will have occurred. Therefore, be sure to inform your real estate agent, CPA, attorney and escrow closer if you are contemplating a 1031 Tax-Deferred Exchange.
3) Acquiring property from a related party.
The IRS severely limits the ability to buy property from a related party to complete a 1031 Exchange. However, there is authority that suggests that the taxpayer can buy property from a related party if the related party uses the cash received to participate in their own 1031 Exchange. Anytime a related party is involved in your exchange we suggest you discuss the proposed transaction with your tax advisor.
4) Overfunding the loan on Replacement Property.
In order to have a complete deferral of taxes, the IRS has three requirements: 1) that you buy equal or greater in value to your sold property, 2) that you use all of the cash proceeds from the sale on purchasing like-kind Replacement Property, and 3) that you replace the value of the debt that was on your Relinquished Property. If your loan is too large, you will not be able to utilize all of the proceeds from the sale of your old Relinquished Property. This will result in taxable “boot”.
5) Using a disqualified party as a Qualified Intermediary or closing agent.
Taxpayers sometimes ask if their attorney or accountant can act as their 1031 Qualified Intermediary . Unfortunately the Tax Code considers these parties to be “disqualified” if they performed professional services for the taxpayer within the previous 24 months. A professional Qualified Intermediary, such as IPX1031, should be utilized to handle the “QI” responsibilities.
Investment Property Exchange Services, Inc. (IPX1031) is a Qualified Intermediary providing a full range of tax deferred exchange services across the country including Forward, Reverse and build-to-suit transactions. 1031 Exchanges are all we do here at IPX1031, so we know the ins and outs of the safe harbor regulations. We pride ourselves on not only being the industry leader in service and security, but also strive to be an information resource. As the nation’s largest 1031 Intermediary, IPX1031 has offices throughout the country and a highly skilled team of exchange attorneys, CPAs, coordinators and sales executives to provide quick answers. We look forward to helping you and/or your clients maximize qualifying investments through a 1031 Exchange strategy and can immediately help you with setting up a 1031 Exchange.
