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1031 Exchanges

What is a 1031 Exchange

A 1031 exchange, also called a Starker or Like-Kind exchange, is a mechanism to defer capital gains and other taxes on the sale of real property when the real property is replaced with real property of a similar use or kind (i.e., investment property). In other words, if the 1031 exchange is properly structured, you won't have to pay certain taxes when selling the investment property today, but you may have to pay those taxes months or years down the road depending upon how you structure your real property ownership.

The Internal Revenue Service rules and regulations regarding how to properly structure a §1031 exchange are extensive, books are even written about the process, so please consider this a brief introduction into the topic. Every exchange is different and the application of the general principles discussed below will vary depending on the specific facts of the transaction. You (as the taxpayer) should seek the advice of your attorney or tax consultant before participating in a 1031 exchange as Knight Barry Exchange LLC ("KB Exchange") and its sister companies do not and will not provide legal or tax advice to you.

Definitions

Qualified Intermediary is defined in 26 CFR §1.1031(k)-1(g)(4) stating that a Qualified Intermediary is a person who (A) Is not the taxpayer or a disqualified person (as defined in 26 CFR §1.1031(k)-1(k)), and (B) Enters into a written agreement with the taxpayer (the "exchange agreement") and, as required by the exchange agreement, acquires the relinquished property from the taxpayer, transfers the relinquished property, acquires the replacement property, and transfers the replacement property to the taxpayer. The Qualified Intermediary is a 3rd party, not related to you, who must hold the $$ from the sale of your current investment property (Relinquished Property) which $$ will be reinvested into your new investment property (Replacement Property). YES KB Exchange IS a Qualified Intermediary.

Relinquished Property is defined in 26 CFR §1.1031(k)-1(a) as property exchanged by the taxpayer that is "held for productive use in a trade or business or for investment".The Relinquished Property is your current investment property that you are selling and will be replacing with new investment property.

Replacement Property is defined in 26 CFR §1.1031(k)-1(a) as property received by the taxpayer "to be held either for productive use in a trade or business or for investment". The Replacement Property is your new investment property that you are buying to replace your old investment property.

Frequently Asked Questions

Generally, the nonrecognition rules for like-kind exchanges apply only to exchanges of real property held for investment or productive use in your trade or business and not held primarily for sale. Please speak with an accountant or attorney to determine if your transaction qualifies. You may also wish to review IRS Publication 544 (Sales and Other Dispositions of Assets) available on the IRS website (www.irs.gov), Section 1031 of the Internal Revenue Code (26 US Code §1031) and the IRS Federal Regulations on point (26 CFR §1.1031).

We strongly encourage you to engage an attorney and/or accountant before selling the Relinquished Property so you can understand how the exchange will affect your tax returns. Your attorney/accountant should also review the closing statement(s) to confirm that you are maximizing the deferral of capital gain (for example, you may want to pay rent and security deposits to the buyer directly, outside of the closing statement(s), to avoid taxable boot).

First, you must close on the sale of the Relinquished Property, and the exchange funds/sales proceeds must be immediately deposited with the Qualified Intermediary (KB Exchange) - under the IRS rules, you are not allowed to take any $$ from the sale. Then, the closing date of the sale of the Relinquished Property starts the clock on the period you have to identify and close on your new Replacement Property. You must identify your Replacement Property within 45 days of the closing date of the sale of the Relinquished Property. The exchange period ends the earlier of: (i) 180 days after the transfer of the Relinquished Property or (ii) the due date of your federal tax return for the year the Relinquished Property was transferred, including extensions. The exchange period may end earlier if you either fail to identify any Replacement Property timely or close on all identified Replacement Properties, as discussed in more detail below.

You must identify all potential Replacement Properties within 45 days (including holidays and weekends) after the closing date for the Relinquished Property, even if the 45th day falls on a Saturday, Sunday, or legal holiday.

KB Exchange has created the "Identification of Replacement Property Form" for you to use to identify the Replacement Property. The written identification must be signed and hand-delivered, mailed, emailed or faxed by midnight on the 45th day to the Qualified Intermediary (KB Exchange). This form can be amended, revised, or even revoked within the 45-day identification period, provided that written delivery of the revision or revocation is timely made.

Yes - the maximum number of Replacement Properties you can identify is:
  • Three Property Rule: Three properties regardless of their fair market value.
  • 200% Rule: Any number of properties may be identified, but their total value cannot exceed twice the value of the Relinquished Property.
  • 95% Exception: If at the end of the 45-day identification period you've identified more properties than permitted under IRS regulation, the only property considered identified is: (i) Replacement Property purchased before the end of the 45 days, and (ii) Replacement Property identified within the 45 days and purchased before the end of the exchange period but only if the fair market value of the property is at least 95% of the total fair market value of all identified Replacement Properties.

You must acquire the Replacement Property the earlier of: (i) 180 days after the transfer of the Relinquished Property or (ii) the due date of your federal tax return for the year in which the Relinquished Property was transferred, including extensions.

If KB Exchange is your Qualified Intermediary, then we will deposit the exchange funds into our custodial escrow account. The escrow account may be interest-bearing for an additional fee (see schedule of fees below).

Contact our 1031 coordinators, Tami Yunke 920.785.7064 and Scotti Schmid 414.727.4545 (1031exchange@knightbarry.com) and provide information about the closing.

We are asked this question frequently and the answer may not be what you expect or want, but know that the answer is dictated by the IRS. Suppose you've identified one or more Replacement Properties within the 45-day identification period and are now beyond the 45-day identification period. In that case, IRS regulations dictate that KB Exchange must hold onto the money until you've either purchased ALL of the identified Replacement Properties or the 180-day exchange period has expired. The one minor exception to this rule is if your failure to purchase the Replacement Property is because of a circumstance beyond your control and the control of any "disqualified person."

Unfortunately, IRS regulations say no.

No. The discussion on this page is for a forward exchange where the Relinquished Property is sold first, and the improved Replacement Property is purchased later. There are different forms of 1031 exchanges, including:
  • Reverse Exchanges - where the Replacement Property is purchased before the Relinquished Property is sold
  • Installment Sales - where one of the parties holds a carry-back promissory note as part of the 1031 exchange
  • Build to Suit - where part of the exchange funds are used to make improvements to the Replacement Property
These types of 1031 exchanges can be complicated and require a unique set of documents to be signed at the first sale/purchase. If you intend to enter into a Reverse Exchange, Installment Sale or Build to Suit, or any exchange other than a forward exchange, please let us know before you sell the Relinquished Property so that we can provide the resources to facilitate your transaction and preserve your intended exchange.

EXCHANGE FEE – TITLE FOR RELINQUISHED PROPERTY ISSUED BY A MEMBER OF THE KNIGHT BARRY TITLE GROUP:

Wisconsin
Exchange Fee
(Includes Relinquished Property and one Replacement Property) 		$750.00*
Each Additional Replacement Property Exchange Disbursement $175.00**
Minnesota
Exchange Fee
(Includes Relinquished Property and one Replacement Property) 		$800.00*
Each Additional Replacement Property Exchange Disbursement $175.00**
Florida
Exchange Fee
(Includes Relinquished Property and one Replacement Property) 		$800.00*
Each Additional Replacement Property Exchange Disbursement $175.00**

EXCHANGE FEE - TITLE FOR RELINQUISHED PROPERTY ISSUED BY A 3RD PARTY:

Exchange Fee
(Includes Relinquished Property and one Replacement Property) 		amount shown above PLUS $100.00*
Each Additional Replacement Property Exchange Disbursement $150.00**
Other Fees, as Applicable
Funds to be deposited into an interest Bearing Account
(the interest rate will fluctuate) 		$100.00*
Cancellation fee (due if KB Exchange is asked to draft Exchange Documents and then you choose not to proceed with the exchange) $100.00

*Due at close of escrow of the Relinquished Property.
**Due at close of escrow of the Replacement Property.

Where can I find more information about 1031 Exchanges?

The internet is replete with information about 1031 Exchanges but for a deeper dive into the IRS rules and regulations, you may wish to review some primary source materials including IRS Publication 544 (Sales and Other Dispositions of Assets) available on the IRS website (www.irs.gov), Section 1031 of the Internal Revenue Code (26 US Code §1031) and the IRS Federal Regulations on point (26 CFR §1.1031). Here at KB Exchange, we have also found the book "Tax-Free Exchanges under Sec. 1031" written by Mary B. Foster and Jeremiah M. Long an incredible source with a wealth of information.

Of course you should always consult with your legal and accounting professionals before you enter into an exchange to understand how the exchange will affect you and your tax returns.

When selecting a Qualified Intermediary to assist you in your next 1031 Exchange transaction, choose an industry leader like KB Exchange. Contact our 1031 coordinators at 1031exchange@knightbarry.com or by phone.

Scotti Schmid - 414.727.4545
Tami Yunke - 920.785.7064

Knight Barry Title Group
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