The capital gains taxes imposed when selling an investment property can be bothersome for any real estate investor. Thankfully, section 1031 of the IRS Code of 1986 offers a way for real estate investors to defer those taxes by exchanging one investment property for another. This is called a 1031 tax exchange, and it's a much-needed solution if you are looking to defer capital gains taxes from the sale of investment real estate.

 The following information is designed to help you ask the right questions of your legal and tax advisors as well as  your Title Company and Qualified Intermediary. This report should never substitute for professional counsel and advice.

1.) Don’t Touch The Money:

IRS rules do not allow you to have “constructive receipt” of funds. Make sure that you have set up an account with a Qualified Intermediary (QI) BEFORE you close on your relinquished property. Most large title companies have a QI division.

2) The 45 Day Rule:

Once you have sold your relinquished property you have just 45 days to name a replacement property. This 45 days is “hard” and it includes week-ends and holidays.

3) The 180 Day Rule:

Once you have sold your relinquished property you have just 180 days to close on your replacement property. This 180 days is “hard” and it includes week-ends and holidays.

4) Your QI Cannot Be a “Disqualified Person:”

Be sure to avoid any conflict of interest when selecting a Qualified Intermediary (QI), the person holding the escrow funds. To avoid any conflict of interest the QI that you choose could not have acted as your employee, attorney, accountant, real estate agent, investment banker or broker in the last two years preceding the sale of your  relinquished property; nor may they be a relative. There are a few exceptions to this, see your advisors for specific  information.

5) Close Relinquished Property Correctly:

It is essential that prior to closing (transfer) of the relinquished property there be the proper forms in place; some suggested forms include:

• Qualifying exchange and escrow account agreement
• An assignment of contract
• A notification of assignment
• Instructions to the settlement agent / attorney for disbursement of the proceeds
• Other forms as directed by your advisors

6.) Buy As Much Property:

In exchange terminology “boot,” (potential taxable income), occurs when you purchase a replacement property of lesser  value or fail to invest all of the “cash” received. You can avoid “cash boot” by owning a replacement property of the same or greater price.

7) Have As Much Mortgage:

In exchange terminology “mortgage boot” occurs when you purchase a replacement property with less debt than the relinquished property. There are cures for this so be sure to ask your advisor. If your relinquished property had a mortgage of 50% it might be wise to replace it with a property that has at least a 50% debt on it.

8) Title In Same Name:

It is important to purchase and take title in the replacement property (the new property you wish to purchase) in the same name(s) and tax I.D. number as was used with the relinquished property (property sold). Though there are some exceptions to this rule, such as the use of a revocable trust, you should discuss any proposed changes in how the replacement property will be titled with your Qualified Intermediary and tax advisor.

9) Name Three Properties:

You are allowed to name three replacement properties before the 45 day time limit expires, so do it! Failure to name a second or third possible alternative has more than once been the downfall of a planned exchange. You can’t control everything so be sure to name a “back-up” or two.

Visit   1031.jverar.com   for more information and available property.

This information is no substitute for advice from your financial and legal advisors. Because Jverar  and Associates  and its representatives does not give advice on either tax, legal or 1031Exchange matters, and because we do not know if the purchase of one of our buildings will meet your needs, you should consult your financial, tax and legal advisors for specific information and advice.