Remax
Austin Associates3006 Bee Caves Road A210
Austin, Texas 78746
512-328-3400 direct
512-328-8333 office
jr@austinhomefinders.com
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Remax Austin Associates 3006 Bee Caves Road A210 Austin, Texas 78746 512-346-3400 direct 512-328-8333 office jr@austinhomefinders.com |
1031 Tax Exchange Thinking of selling your property? Let us show you how a 1031 exchange may help you. 1031 your property to anywhere in the country - even defer your capital gains and depreciation recapture tax! We have helped many clients with 1031 exchanges. How far can 1031 take you? The sky's the limit! Call us at 877-873-3400 today. The Tax Deferred Exchange has become the tool of choice for Real Estate investors who wish to defer taxes on both capital gains and depreciation when a property is sold. Because the goal of most investors is to make a profit, the payment of taxes can seriously dilute an otherwise good return on an investment. The tax deferred exchange has been part of the tax code since 1921, but it has become popular only in the last decade due to changes in the tax code that have made the process both easier to understand and more practical to use. Real Estate professionals doing business in the 90's may well find that an Exchange transaction will find them before they feel knowledgeable enough to create one on their own. This information was written for people who are not familiar with tax deferred Exchanges and has been gleaned from the authors practical experience in structuring and closing thousands of tax deferred Exchanges over the last twenty years. Like most people, I learn a new subject more easily if it is presented in plain English. This is my attempt to do that for you. Overview
Beginning in the early 1920's, the Federal Tax Code has allowed owners of real estate to defer taxes on the sale of property held for business or investment by using the rules contained in what is now Section 1031 of the Federal Tax Code. The Exchange process can defer taxes on both capital gain and depreciation. Currently, forty-eight of the fifty states have recognized the 1031 Exchange as being applicable to deferral of State taxes as well. In the case of Oregon and South Carolina, the property received in an Exchange must be located in the same state to qualify for State tax deferral. It has been estimated that from 30 to 40 percent of all real estate sales involve properties that would qualify for Exchange treatment but because most property owners are not familiar with the process, it is not used with the frequency that it should be. The Tax Reform Act of 1986 eliminated preferential treatment of long term capital gain and made the deferral of taxes an integral part of good investment strategies. Prior to 1986, 40% of gains were subject to tax, now, however, 100% of gains are subject to tax at Federal rates of up to 20%. Depreciation taken is taxed at 25 %. State income taxes, if applicable, would further add to the tax burden. Many property owners have concluded that selling appreciated real estate is economically impractical unless the Exchange process is utilized. The basic requirements of an Exchange are relatively simple. The investor (Exchanger) first finds someone to buy his property, and beginning from the day the sale closes, the Exchanger has a maximum of 180 days to purchase one or more properties to replace what was sold. Replacement property must be identified in writing within 45 days of the closing of the old property. In at least one respect, the Tax Deferred Exchange is similar to the old rules (prior to May 1997) that applied to the rollover of gain from the sale of a primary residence in that the property purchased must equal or exceed the adjusted sales price ( sale price less closing costs) of the property sold. If a less costly property were purchased, taxes are owed on the difference in cost. One major interesting feature of an Exchange is that all of the equity from the sale of the "old property" must be reinvested in the "new property" and equity that remains unspent becomes taxable. In addition, the use of an arms length third party who is called a 'Qualified Intermediary' to facilitate an Exchange transaction has been mandated by the Federal Tax Code since 1991. During the last 70 years, the Exchange process has been referred to by different names such as Like Kind Exchange, Starker Trust or Exchange, Deferred or Delayed Exchange, Simultaneous or Concurrent Exchange, Reverse Exchange, Alderson Exchange, Baird Exchange, Two, Three, or Four Party Exchange, and so on. Regardless of what they are called, every Exchange must conform to the same rules found in Section 1031 of the Federal Tax Code. The following is a summary of basic Exchange rules that apply to all Tax Deferred Exchanges. In most cases the rules are very specific and must be closely adhered to in the event that an Exchange is audited by the IRS. Breaking rules invites a "disallowed" Exchange which is the same as not having done one at all. Interpretation of the rules is often done by reviewing court cases that have set legal precedent and Revenue or Letter rulings which are written opinions by the IRS in response to questions submitted by taxpayers regarding a proposed Exchange transaction. The Role of The Qualified Intermediary The Qualified Intermediary ... In 1991, Section 1031 of the Tax Code was modified to include the use of a "Qualified intermediary" to facilitate a Tax Deferred Exchange. The Qualified Intermediary is defined as a person who is not related to the taxpayer and who does not fulfill a role as the taxpayer's accountant, attorney, or real estate broker, family member, employee, employer or other related party. One of the most critical elements of the exchange process is that the taxpayer may not receive or control any of the cash proceeds resulting from the sale of his property. The code refers to the Qualified Intermediary as a "Safe Harbor" in the sense that the Intermediary will be the party that will receive the cash proceeds from the sale of the taxpayer's property instead of the taxpayer himself. The Intermediary will hold the proceeds in a qualified escrow or "trust" account until such time as the taxpayer purchases a replacement property. The essential functions of the Intermediary are as follows... 1. Consultation with the taxpayer to determine the feasibility of an Exchange based on the estimated tax liability on the proposed sale of a property. 2.
Structuring an Exchange format to achieve the taxpayer's investment
goals while meeting the Tax Code guidelines for minimizing or
completely eliminating tax liabilities on the proposed transaction.
Currently there are at least five available Exchange formats.
They are: 1. Delayed or Deferred Exchange in which the replacement
property is acquired up to 180 days after the relinquished property
closes. This is the most popular format. 2. A Simultaneous Exchange
occurs when both properties close on the same day. 3. The Reverse
Exchange allows for the closing of the replacement property before
the relinquished property is closed. 4. Improvement Exchanges
utilize a portion of the proceeds from the relinquished property
to 3. Document Preparation is important to create a paper trail that will characterize the transfer of an investment property as a Tax Deferred Exchange as opposed to a taxable sale. Technically accurate Exchange documents are created by the Qualified Intermediary for this purpose and are specially designed for each Exchange format. Closing instructions are created that conform to the Exchange format and provide a written narrative of the transaction that will demonstrate compliance with the requirements found in the code. 4. Closing Coordination is vital to ensure that pertinent Exchange documents are signed by the proper parties in the required sequence and that the taxpayer is never seen to be in control or receipt of sale proceeds during the Exchange process. The doctrine pertaining to actual or constructive receipt of Exchange proceeds by the taxpayer is central to a valid exchange. Closings are monitored by the Qualified Intermediary to ensure that deposits, option moneys, closing costs, fix up expenses, rehabilitation costs, and other disbursements that occur at closing are handled in such a way that they will not cause the Exchange to be disallowed under audit due to constructive receipt of Exchange proceeds 5. Audit Preparedness is of central importance to all Exchangers. A Qualified Intermediary should maintain a Master Exchange File containing all of the closing documents that relate to the Exchange so that the taxpayer will be able to demonstrate compliance with the provisions of the tax code should he ever be audited by the IRS. Even the best laid plans for tax deferral hinge on the creation and execution of paperwork that may be at some point be scrutinized by the IRS. Exchange documents, deeds and closing statements are routinely used by tax prepares to defend audits. Exchange documentation that clearly demonstrates both the intent to Exchange and strict compliance with Exchange rules will help to prevent an Exchange from being disallowed at audit. For example, deeds will help to identify closing dates on both old and new properties. Closing statements will show property values and closing costs and more importantly, "where the money went' at closing, and Exchange documents give validity to the whole process. The Earnest money contract will begin the paper trail that will help to distinguish a transaction as a Tax Deferred Exchange. In addition, the Contract will contain useful information as to how the Exchange should be structured. Here are a few of the more common things that need to be addressed. 1. The Exchange Clause... Every Earnest Money Contract that is written for an Exchange should contain an 'Exchange Clause. Here's what one looks like: For property Being Sold SALE OF THE SUBJECT PROPERTY IS PART OF A SECTION 1031 TAX DEFERRED EXCHANGE. THE BUYER AGREES TO AN ASSIGNMENT OF THE SELLERS INTEREST IN THIS CONTRACT TO A QUALIFIED INTERMEDIARY TO EFFECT SAID EXCHANGE. NO ADDITIONAL COST OR LIABILITY WILL BE INCURRED ON THE PART OF THE BUYER. For property Being Purchased PURCHASE OF THE SUBJECT PROPERTY IS PART OF A SECTION 1031 TAX DEFERRED EXCHANGE. THE SELLER AGREES TO AN ASSIGNMENT OF THE BUYERS INTEREST IN THIS CONTRACT TO A QUALIFIED INTERMEDIARY TO EFFECT SAID EXCHANGE. NO ADDITIONAL COST OR LIABILITY WILL BE INCURRED ON THE PART OF THE SELLER. Some of these clauses can be a lot longer and more elaborately crafted, but they all accomplish the same two things: A. Establish the clients intent to make a Tax Deferred Exchange as opposed to a taxable sale. The IRS likes to see the Exchange Clause because the Earnest Money Contract is one of the documents that they will be looking at to determine if the transaction qualifies as an Exchange. To them, the demonstration of an intent to Exchange is important. B. It's a good idea to let the Buyer (or Seller) know early on in the transaction that there's something a little different going on in the transaction. Most Buyers don't have a clue what an Exchange is, and it's a good idea to get their questions answered at the time the offer is tendered rather than at closing when other issues may be causing a lot of stress. Sometimes an Agent will not put the Clause in the body of the Contract but will include it in an addendum, a counter offer or an exhibit 2.
Identify The Exchanging Parties ... When property is owned by
more than one person, make sure who is utilizing the Exchange
Process and who is not. For example, it cannot be assumed that
a husband and wife who are both on title to the old property are
Exchanging into a new property together, in fact many people use
the Exchange process for the disposition of assets in a divorce.
One party may want to cash out and the other may want to Exchange
their portion of the sale proceeds into another piece of property.
On occasion, you will find several owners of the property doing
their own separate Exchanges simultaneously, and on the same piece
of real estate. The reason for this is that if they all use the
same Exchange "umbrella', and 3. Continuity of Title ... The taxpayer or entity that owned the old property must be the same taxpayer or entity that acquires the new property. The reason for this is that the IRS wants to see the acquisition of the new property on the same parties tax return that disposed of the old property. It is possible to add a person to the title of the new property that is acquired in the Exchange. This can be done without dire tax consequences as long as the added party goes on title for a clearly defined fractional interest that gives our Exchanger a remaining fractional interest that has a corresponding value that is no less than the value of what he sold. 4. Identify Trusts, Corporations and Partnerships ... Contracts should accurately reflect the party or entity as they appear on ownership documents. Exchange documentation created by the Intermediary must reflect the actual owner of the property, and if it doesn't, it may destroy the Exchange. If the deed shows a partnership as the owner or the property it becomes important to determine if the sale of the property will result in the break up (also called a 'Drop Down') of the partnership interests. If so, the Exchange may not be valid. The tax code indicates that the Exchange of "Partnership Interests" are not permitted. Partnerships, Trusts, and Corporations can Exchange property but as a general rule they must remain intact to do it. An exception may be property owned by two or more parties or entities who are characterized as "Tenants in Common". These owners may dissolve their relationships and use the Tax Deferred Exchange to do it. Partnership Exchanges must be carefully be structured to provide compliance with the tax code. 5. Option Money Paid...To the Exchanger prior to closing may or may not be taxable. The crux of the issue is whether or not the Option Money is going to be applied to the purchase price. If it isn’t, it’s taxable no matter what it's used for. Option Money applied to the purchase price is treated the same as earnest money. If the Exchanger has the money under his control at closing, it is taxable. If, however the money is forwarded to the Intermediary at the closing then it can become tax deferred along with the rest of the proceeds of the sale. Option Money that will be applied to the purchase price needs to be delivered to the title company prior to closing, and at closing, must be disbursed to the Intermediary. Failure to do this will cause the Exchanger to pay taxes on the Option Money. 6. Seller Financing ... It must be determined prior to closing who will be named as the beneficiary of the note. It could be the Exchanger, in which case the note will be taxable to him, most likely according to Installment Sale rules, or the beneficiary could be the Intermediary if it is contemplated that the note will be used to purchase the replacement property. The mechanics of using notes to buy replacement property are complex but to use a note in an Exchange, the beneficiary or payee must be the Intermediary and the note must be used (usually by converting it to cash) to purchase the replacement property. Once the closing takes place, it's impossible to change the beneficiary of a note from a tax point of view. 7. Personal Property Included in the Transfer ... Personal Property is not real property. The Tax Code says that real property can only be Exchanged for other real property, and that any personal property received in an Exchange will be taxable to the extent that Exchange monies are used to pay for it. If you think about it, most all real estate sales and purchases include some incidental personal property whether it be a refrigerator, freestanding stove or some other item not considered appurtenant to the real estate. The sale of a business may include, as part of the sale price, real estate, inventory, goodwill, fixtures and equipment, a covenant not to compete and various licenses and permits. It is possible to Exchange real property, and personal property used for business such as fixtures and equipment, but intangibles will not qualify. Farms and ranches also have their own unique blend of real and personal property. For a successful Exchange, make sure that the various assets being transferred have been identified so that the closing statements reflect that which is being Exchanged and that which is not. 8. Farm and Ranch Property That Includes a Residence ... An allocation of value must be made as to how much of the sales price relates to the Residence and how much relates to the real estate used for business activities. Proceeds of the sale of the Residence (less prorated closing costs) can be disbursed directly to the Exchanger at closing, whereas proceeds from the business property (less prorated closing costs) must be disbursed to the Intermediary. Recurring closing costs such as prorations of property taxes are not considered to be closing costs. By creating a line item for each individual closing expense the taxpayers accountant and the IRS will be better able to determine what is taxable and what isn't. Watch out for personal property connected with Farm and Ranch sales, in fact you might want to drop personal property value from the closing statement and instead show it on a Bill of Sale which more accurately reflects the quality of what is being sold. 9.
Multiple Units With One Unit Owner Occupied ... Similar to Farms
and Ranches, an allocation of value must be made between the Owner
Occupied unit and the rented units. Avoid showing prorated rents
and security deposits as being a debit to the seller and a credit
to the buyer on the closing statement. If this is done, the rents
and deposits will be taxable to the Exchanger because that portion
of the proceeds will be shown to have been used for operating
expenses instead of being used for non recurring closing costs
or to acquire replacement real estate as the Tax Code requires.
If the closing statement reflects a debit to the Exchanger for
these expenses (read taxable) it cannot be "fixed" at a later
date. The IRS views your closing EARNEST MONEY CONTRACT CHECKLIST Property Address___________________________________________________________ Sales Price________________________________________________________________ Total Outstanding Loans______________________________________________________ Adjusted Basis_____________________________________________________________ {Y) {N} Does the Contract contain an Exchange Clause? {Y) {N} If multiple owners, are all Exchanging? {Y) {N} Is the owner a trust, corporation or partnership? {Y) {N} Has the seller received option money? {Y) {N} Does the contract call for seller financing? {Y) {N} Any personal property identified in the contract? {Y) {N} Farm or ranch that includes a personal residence? {Y) {N} Multiple unit building that includes a residence? {Y) {N} Credits for deposits or pro-rated rents? Every Exchange must be based on an Exchange Agreement. It is a contract between the Exchanger and a Qualified Intermediary. In general it states that the Exchanger agrees to transfer his old property to the Intermediary in exchange for a new property to be supplied by the Intermediary within 180 days. Also contained in the contract are the terms and conditions under which this "exchange" of properties will occur. In real life, the Intermediary will not receive property from the Exchanger, and will not have a property to give to the Exchanger. This situation may sound contradictory, and it is, but the Tax Code requires the appearance of an actual Exchange of property to be taking place in order to qualify as a valid Exchange. Most Exchanges begin with an Earnest Money Contract between a seller and a buyer. The contract basically says that the buyer will receive property from the seller, and the seller will receive cash or other consideration from the buyer. To convert the sale into an Exchange, it becomes necessary to substitute the Intermediary as the seller of the property. This is done because the Contract calls for the seller to receive consideration for his property. In an Exchange, the Intermediary must receive the consideration, not the seller. Both seller and buyer must sign the Assignment Agreement on or before the date of closing to approve of the substitution of the Intermediary. When we ask a buyer to "Cooperate" in effecting a Tax Deferred Exchange, we are asking that he or she sign an Assignment Agreement. Sometimes an Assignment Agreement is called a Novation Agreement. Replacement (new) property must be identified in writing within 45 days of the close of the old property. The form must be delivered to the Qualified Intermediary by midnight of the 45th day following the close of the relinquished property. Failure to deliver the form on time will void the Exchange. The properties need not be under contract to qualify as being identified. No extensions of the 45 day time limit are allowed. No "official" form has ever been created by the IRS or anyone else, however the following form has been used with success for over ten years. Sample Identification Form PROPERTY IDENTIFICATION FORM It is imperative that you make a written identification of replacement properties within 45 days of the close of the property at 16500 San Pedro, San Antonio Texas. The close date was March 27, 1998. Identify the property you want to acquire by street address or legal description including city, county and state in which the property is located. If your list includes four or more properties, you must include the fair market value of each property. You may purchase one or more properties on the list with the following exception. If four or more properties are identified, and the total fair market value of all the properties is greater than twice the contract price of the property you sold, then you must purchase all of the properties on the list. Call us if you have any questions regarding multiple property identification, CALL (210) 545- 6762. YOUR INTERMEDIARY MUST RECEIVE THIS FORM BY May 8, 1998 Failure to deliver this form to the Intermediary by the above date will void your Tax-Deferred Exchange We strongly recommend that you send the form to us by registered mail so that you have proof of the delivery date. Save a copy of the form for your records. EXCHANGE PROPERTY MUST CLOSE ON OR BEFORE September 20, 1998 I/we have identified the following properties as suitable exchange properties pursuant to the Exchange Agreement by and between the undersigned and National Exchange Services Inc. Address or Legal Description Fair Market Value 1. ____________________________________________________________ 2. ____________________________________________________________
3. ____________________________________________________________
Exchanger________________________________________Date____________ The Tax Code outlines the procedures for identification of replacement properties to be purchased in a Tax Deferred Exchange The regulations consist of three basic rules that serve to limit the number of properties that can be identified. The rules are called the Three Property Rule, the 200 % Rule, and the 95 % Rule, the last two of which are based on the Fair Market Value of the properties that are identified. Fair Market Value in this case means value without deductions for any loans or other liabilities secured by the property. Fair Market Value of the replacement property is determined at the end of the 45 day identification period. To be safe, use the asking price of the property as Fair Market Value. 1. The Three Property Rule ... The Three Property Rule indicates that we may identify up to three replacement properties regardless of their Fair Market Value. If you intend to buy only one replacement property, it still may be wise to identify one or two alternate properties in case the first property purchase falls through. It is not necessary to purchase all of the identified properties. For those who are planning to identify and purchase no more than three replacement properties, the 200 % and the 95 % Rules will not apply. 2. The 200% Rule ... The regulations permit the identification of more than three replacement properties but only under the following circumstances ... The total Fair Market Value of ALL of the identified properties must not exceed twice (200%) of the contract price of the property sold. Exceeding the 200% limit will void the Exchange. There is one exception to this rule, and that is….. 3. The 95% Rule ... If more than three properties have been identified , and their total Fair Market Value exceeds 200% of the value of what was sold, the Exchange may still be valid if … 95 % of the total cost of all properties on the list are purchased. From a practical point of view, it may well be said that ALL of the listed properties must be purchased because if one of the listed properties was not purchased, there must be at least 19 others on the list to satisfy the 95 % Rule. 4. Avoiding The Rules ... None of the above described rules are applicable if all of the acquisition properties are closed within 45 days of the close of your old property. It's easy to see that by planning to acquire multiple properties, avoiding the 200% Rule in particular could be advantageous. Wrapping up the exchange in 45 days may seem difficult, but experience has shown us that adequate planning before the Exchange begins can lead to a successful close within 45 days. If Exchanging out of multiple properties, the first property that closes will begin the 45 day identification period. 5. How To Identify Properties ... Properties must be clearly and accurately identified in writing and the Property Identification Form MUST be delivered to the Intermediary by midnight of the 45th day. Deletions or substitutions of properties made during the 45 days must also be in writing. There are NO circumstances that will allow for an extension of the identification period. Simultaneous Exchanges Years ago the only way to effect a Tax Deferred Exchange was to make the closing of both the old and new property occur on the same day, or "simultaneously". This is sometimes referred to as a "concurrent close". The problems associated with Simultaneous Exchanges are legendary. For example, if two or more properties need to close concurrently, but one of the closings is delayed because of loan funding problems, is the other closing postponed? The answer of course is yes, and this is one of the reasons that the Tax Deferred Exchange has never been popular until recent changes in the Tax Code have allowed for closings up to 180 days apart. This makes life much easier for all the parties involved and leads one to believe that anyone wishing to make a simultaneous close must enjoy the challenge because there is no real necessity for it. Some agents and closers still believe that a Qualified Intermediary is not necessary when performing a Simultaneous Exchange. The Tax Code is clear that the only "Safe Harbor" available for a Simultaneous Exchange is the use of a Qualified Intermediary. The logic behind the Safe Harbor is that if the Exchanger is shown to be a principal in the closing, then he has the ability to request Exchange proceeds from the closer. The closer, of course, having an agency relationship with the Exchanger, must comply. This relationship also means that the Exchanger is deemed to have had control or "Constructive Receipt' of Exchange Proceeds during the Exchange. If under audit the IRS can prove that the Exchanger had control of Exchange Proceeds the Exchange would be deemed to be invalid. Using an intermediary solves this problem because the Exchange Agreement together with an Assignment Agreement substitutes the Intermediary for the Exchanger as both the seller of the old property and the buyer of the new property, with control over Exchange Proceeds, thus becoming a principal in both closings. The substitution effectively distances the Exchanger from the closings so that he has no opportunity to control Exchange Proceeds. If there were one issue that was pivotal in determining whether an Exchange is valid it would have to be the Doctrine of Constructive Receipt. The Tax Code is clear that an Exchanger who is shown to control Exchange Proceeds will invalidate a Tax Deferred Exchange. This is the primary reason that the Tax Code calls the Qualified Intermediary a "Safe Harbor" for the prevention of constructive or actual receipt of Exchange Proceeds. Delayed Exchanges Closings of the old property and the new property can be separated in time by up to 180 days in a Delayed Exchange. Acquisition property must be identified in writing by the 45th day of the close of the relinquished property. A Trust Account is maintained by the Intermediary to hold Exchange Proceeds between the sale of the old property and the purchase of the new property. For security purposes, Exchange Proceeds are wire transferred both into and out of the Intermediaries Trust Account Reverse Exchanges The normal Exchange procedure is to first sell the old property and then acquire a new property. As the Reverse Exchange implies, the process is reversed in that the Exchanger first acquires the new property, then sells the old property. The Tax Code is not clear that Reverse Exchanges fall under the 1031 Exchange Rules, but if properly structured as a time tested Simultaneous Exchange, most practitioners agree that a properly structured Reverse Exchange should survive an audit. Reverse Exchanges should not be attempted without the help of an experienced Qualified Intermediary. There are two basic formats for the Reverse Exchange, both of which require that the Intermediary take title to at least one property in the Exchange. In both cases, the Intermediary will undertake the burdens of ownership of the property in that he will be responsible for making mortgage payments, tax and insurance payments, collecting rents and other obligations connected with property ownership. From the Intermediaries perspective this is not a job for the faint of heart. The following is a brief description of both formats for Reverse Exchanges. 1. Intermediary Holds the New Property ... The Exchanger loans money to the Intermediary to purchase the new property. The Intermediary takes title to the new property and holds it until the Exchanger sells his old property. On the same day the old property closes, the Intermediary deeds the new property to the Exchanger. This type of Reverse Exchange will only work if the Intermediary can take title to the new property without having to qualify for institutional financing on the new property. If the Intermediary can buy the property in an all cash purchase, assume existing financing without qualifying or initiate owner financing with the agreement of the seller (later to be assumed by the Exchanger), this Reverse Exchange format will be feasible. If not, the second Reverse Exchange format can be used. 2. Intermediary Holds the Old Property...The Exchanger purchases the new property and concurrently deeds the old property to the Intermediary. In this case the Exchanger must put a down payment on the new property that would approximate the amount of net cash proceeds he would expect to receive when his old property closes. No doubt this dollar figure would be difficult to determine until the closing takes place, so an educated guess is in order. When the old property sells and closed, the Intermediary deeds the property to the buyer and passes the sale proceeds to the Exchanger. Improvement Exchanges An Improvement Exchange is similar to a Reverse Exchange in that the Intermediary will take title to the new property. The difference is that title will be held by the Intermediary while capital improvements are made to the property. When the improvements are completed, title will then pass to the Exchanger. Generally, the old property will have been sold to provide funds to both purchase the new property and make the improvements, but sometimes the Exchanger has enough personal funds to give to the Intermediary to buy the property and complete the construction prior to selling the old property. In either case, the Intermediary will be on title to the new property while the improvements are being made. An Escrow Account will be opened by the Intermediary to facilitate the disbursement of funds to contractors and suppliers of materials. When construction is completed, the property will be transferred from the Intermediary to the Exchanger. How To Make A Tax Deferred Exchange Determine if the property being sold is Like Kind. See Like Kind Property under Basic Exchange Rules. Contact a Qualified Intermediary. See The Role of the Qualified Intermediary. Locate a purchaser for the property who will make an acceptable offer. See The Exchange Clause under The Earnest Money Contract. Notify the Intermediary so that he can prepare Exchange documents to be signed at the closing. Upon closing, Exchange Proceeds will be wired to the Qualified Intermediaries Trust Account. Replacement property must then be identified in writing within 45 days. See ,Exchange Property Identification Form and Property Identification Rules. Make an acceptable offer on the replacement property. See The Exchange Clause under The Earnest Money Contract. Notify the Intermediary so that he can prepare Exchange documents to be signed at the closing. The Qualified Intermediary will wire transfer Exchange Proceeds to the closer one day prior to closing. The Exchange is now completed. Exchanges must be reported in the tax year that the relinquished property was closed, regardless of the tax year the acquisition property was closed.
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