Category: 1031 Exchange General

We all know that one of the most vexing problems plaguing the trucking industry today is driver turnover and the expense and havoc it creates throughout virtually every trucking organization. We also know that the reasons for driver turnover are not uniform nor predictable and vary dramatically by region, by company and by your operating practices and business model.
Traditional Reasons Drivers Quit
Pay: The perception that the “other company” always pays more and provides better benefits and delivers more miles.
Time at Home: This isn’t the 50s, and family needs and pressures have become a huge catalyst for drivers leaving companies or getting out of the business entirely.
Broken Promises:  Driver turnover is particularly acute with new hires who quit within 90 days of accepting the job, underscoring the perceived gap between what they felt they were told and promised when recruited, versus the reality they experienced once hired.
Aggregate of the Small: This can be the most devastating exit trigger many trucking companies experience and the most frustrating to identify and cure. Like many divorces, truck drivers who quit don’t have one big reason for exit. They simply have an accumulated frustration with a multitude of small – even tiny – irritants that over time will cause dissatisfaction and eventual exit. You name it: payroll, operations, maintenance, delays, etc.. It adds up and proves the old adage that 100 thumbtacks can be as destructive as one railroad spike.
Dissatisfaction with Management: Often overlooked but a huge reason for much of current driver turnover. The old adage is definitely true today: “People don’t quit companies. They quit managers!”
The Impact of Old Equipment on Driver Retention
None of these universal disengagement triggers should come as any surprise to seasoned trucking executives. Whether we accept and act upon them is the million dollar question.
I worked for a national consulting company that interviewed 100,000 drivers during a five-year period. We were surprised by how often aging equipment was cited as a reason for leaving. That’s right; the age of your truck fleet impacts driver satisfaction and retention!
Consider what drivers experience working for trucking companies that try and cut costs by holding on to their fleet longer than they should:

Increased Risk of CSA Violations: It’s common sense that a truck on the fringe of maintenance issues and expense will have a higher potential for unforeseen failure or problems that could tag the driver with a safety violation. 
Increased Discomfort: As drivers realize they are not getting the same “features and benefits” that the newer trucks provide.
Increased Driving Frustration: Let’s face it, driving an old truck is simply not as enjoyable as driving a new truck, especially given the pace of improvements in the later model tractors.
“Truck Envy”:  As your drivers routinely see drivers with other companies at truck stops and on the road sporting brand new state of the art tractors, the attraction of staying with YOUR company is greatly diminished.

In other words, the way you manage your fleet’s finances can have an impact on driver retention. One way to free up funds for updating your equipment is to implement a 1031 like-kind exchange program.
Use a Like-Kind Exchange to Update your Fleet and Reduce Driver Turnover
1031 like-kind exchanges can instantly free up a lot of extra cash that you are currently paying in taxes on the sale of your used equipment – tractors in particular. With bonus depreciation expired, trucking companies are paying between 38%-50% income tax on the sale of their used tractors. That can add up to paying the government up to $17,500 on every used tractor you sell! That’s the kind of expense that delays the purchase of new replacement equipment, with predictable driver turnover consequences.
Consider the following example, which illustrates what happens when 100 trucks (purchased new for $120,000 each) are then sold for $35,000 each:

 
Without LKE
With LKE

Selling 100 trucks with, and without, like-kind strategy

Original equipment cost
$12,000,000
$12,000,000

Tax depreciation allowed
$12,000,000
$12,000,000

Tax basis at sale
$0
$0

Sales proceeds
$3,500,000
$3,500,000

Gain on sale
$3,500,000
$3,500,000

Tax due on gain (40%)
$1,400,000
$0

Cash available for new equipment
$2,100,000
$3,500,000

 
With only 100 trucks, a 1031 like-kind exchange program would have provided $1.4 million additional dollars for the purchase of new tractors. The LKE program converted those tax dollars into extra cash to spend on new equipment. Trucking companies using LKEs are tapping into an interest-free source of capital to keep their businesses rolling and to reduce their driver dissatisfaction with driving older vehicles. The cash benefit via the tax deferral is essentially a line of credit you control – and you decide when to pay back.
The trucking industry is extremely competitive. Your ability to retain your best drivers is absolutely critical to your long term success. Companies that are able to generate this huge amount of extra cash via tax deferral are able to purchase more new tractors more frequently. The ability to upgrade and modernize your fleet is a crucial component of keeping drivers happy, satisfied and working for your company longer.
So the next time you look at your fleet, ask yourself this question: Would the best drivers want to drive that truck?

Potential Threats to Section 1031
Last fall, former Chairman Senator Baucus (D-WY) of the Senate Finance Committee, submitted a draft tax reform proposal that discussed the possibility of eliminating 1031 exchanges. Taxable gains on personal property exchanges were to be mostly absorbed by the introduction of a pooling method for asset depreciation similar to Canada’s. Like-kind exchanges of real property were completely eliminated in the Baucus draft.
Earlier this year, Representative Dave Camp (R-MI), Chairman of the House Ways and Means Committee, followed up with his own ideas outlining comprehensive tax reform with the goal of reducing corporate tax rates to 25%.  This too proposed complete elimination of section 1031 from the Internal Revenue Code by January, 2015.
Quickly to follow we saw President Obama’s 2015 budget proposal limiting the amount of deferral for capital gains to $1 million per taxable year.
So, what does this mean?  
In my opinion, 1031 tax deferred exchanges are not going away this year nor will they be eliminated in the next several years.  Why?  Well let’s look at the drivers responsible for tax reform. 

Senate Finance Committee: Uncertainty in Leadership
Before the end of 2013, but after Baucus submitted his proposed tax reform papers, Senator Baucus announced that he would not be running for re-election in 2015.  Senator Wyden (D-OR) stepped into the role as Chairman of the Senate Finance Committee and quickly let the other members know he would introduce his own ideas that may or may not represent Senator Baucus’ proposal.  A lot will depend on the upcoming elections this November. Should the Republicans retake the Senate, leadership of the Committee will switch and a new agenda most likely will be introduced.
 
House Ways & Means Committee: Lacking Broad Support
Introduction of Camp’s tax reform came without broad support.  Not only did Camp fail to gain support from his own committee members, the House also has very little interest in moving on a Bill that possibly would upset so many constituents.  U.S. businesses who participated in good faith along with elected Representatives by providing ideas that could drive comprehensive tax reform were all surprised when Camp, unilaterally, moved the draft proposal out of Committee.  Representative Camp announced earlier this year that he too will not be seeking reelection, however, he committed to keep working on tax reform.
 
White House: Possible Lame Duck Situation
There is a strong possibility that the Republicans gain control of both the House and Senate this coming November. Should the Senate change control, it won’t be enough to push reform through without bipartisan support.  Additionally, should President Obama wish to move on his agenda, he too is going to need significant support from the other side of the aisle.

Remember, a bill must first be introduced to the floor of the House by approval of the Committee, then voted on by Members of the House.  The same process is performed by the Senate.  Should both separate Bills receive enough votes to pass, then the House and Senate must reconcile a Bill to present to the President, who has the authority to sign OR veto at his discretion. 
Tax reform is difficult.  Comprehensive tax reform is monumental.  We have a Congress who finds it arduous to agree on almost anything presented before them.  1031 like-kind exchanges, whether simultaneous or deferred, most likely, will not be on the chopping block come November of 2014.  Nor do I think LKEs will be legislated away in the next few years – at least without a fight.  Too many employers, associations, service industries, congressmen and women, recognize 1031s are a vital tool in the US economy.

Potential Threats to Section 1031
Last fall, former Chairman Senator Baucus (D-WY) of the Senate Finance Committee, submitted a draft tax reform proposal that discussed the possibility of eliminating 1031 exchanges. Taxable gains on personal property exchanges were to be mostly absorbed by the introduction of a pooling method for asset depreciation similar to Canada’s. Like-kind exchanges of real property were completely eliminated in the Baucus draft.
Earlier this year, Representative Dave Camp (R-MI), Chairman of the House Ways and Means Committee, followed up with his own ideas outlining comprehensive tax reform with the goal of reducing corporate tax rates to 25%.  This too proposed complete elimination of section 1031 from the Internal Revenue Code by January, 2015.
Quickly to follow we saw President Obama’s 2015 budget proposal limiting the amount of deferral for capital gains to $1 million per taxable year.
So, what does this mean?  
In my opinion, 1031 tax deferred exchanges are not going away this year nor will they be eliminated in the next several years.  Why?  Well let’s look at the drivers responsible for tax reform. 

Senate Finance Committee: Uncertainty in Leadership
Before the end of 2013, but after Baucus submitted his proposed tax reform papers, Senator Baucus announced that he would not be running for re-election in 2015.  Senator Wyden (D-OR) stepped into the role as Chairman of the Senate Finance Committee and quickly let the other members know he would introduce his own ideas that may or may not represent Senator Baucus’ proposal.  A lot will depend on the upcoming elections this November. Should the Republicans retake the Senate, leadership of the Committee will switch and a new agenda most likely will be introduced.
 
House Ways & Means Committee: Lacking Broad Support
Introduction of Camp’s tax reform came without broad support.  Not only did Camp fail to gain support from his own committee members, the House also has very little interest in moving on a Bill that possibly would upset so many constituents.  U.S. businesses who participated in good faith along with elected Representatives by providing ideas that could drive comprehensive tax reform were all surprised when Camp, unilaterally, moved the draft proposal out of Committee.  Representative Camp announced earlier this year that he too will not be seeking reelection, however, he committed to keep working on tax reform.
 
White House: Possible Lame Duck Situation
There is a strong possibility that the Republicans gain control of both the House and Senate this coming November. Should the Senate change control, it won’t be enough to push reform through without bipartisan support.  Additionally, should President Obama wish to move on his agenda, he too is going to need significant support from the other side of the aisle.

Remember, a bill must first be introduced to the floor of the House by approval of the Committee, then voted on by Members of the House.  The same process is performed by the Senate.  Should both separate Bills receive enough votes to pass, then the House and Senate must reconcile a Bill to present to the President, who has the authority to sign OR veto at his discretion. 
Tax reform is difficult.  Comprehensive tax reform is monumental.  We have a Congress who finds it arduous to agree on almost anything presented before them.  1031 like-kind exchanges, whether simultaneous or deferred, most likely, will not be on the chopping block come November of 2014.  Nor do I think LKEs will be legislated away in the next few years – at least without a fight.  Too many employers, associations, service industries, congressmen and women, recognize 1031s are a vital tool in the US economy.

Potential Threats to Section 1031
Last fall, former Chairman Senator Baucus (D-WY) of the Senate Finance Committee, submitted a draft tax reform proposal that discussed the possibility of eliminating 1031 exchanges. Taxable gains on personal property exchanges were to be mostly absorbed by the introduction of a pooling method for asset depreciation similar to Canada’s. Like-kind exchanges of real property were completely eliminated in the Baucus draft.
Earlier this year, Representative Dave Camp (R-MI), Chairman of the House Ways and Means Committee, followed up with his own ideas outlining comprehensive tax reform with the goal of reducing corporate tax rates to 25%.  This too proposed complete elimination of section 1031 from the Internal Revenue Code by January, 2015.
Quickly to follow we saw President Obama’s 2015 budget proposal limiting the amount of deferral for capital gains to $1 million per taxable year.
So, what does this mean?  
In my opinion, 1031 tax deferred exchanges are not going away this year nor will they be eliminated in the next several years.  Why?  Well let’s look at the drivers responsible for tax reform. 

Senate Finance Committee: Uncertainty in Leadership
Before the end of 2013, but after Baucus submitted his proposed tax reform papers, Senator Baucus announced that he would not be running for re-election in 2015.  Senator Wyden (D-OR) stepped into the role as Chairman of the Senate Finance Committee and quickly let the other members know he would introduce his own ideas that may or may not represent Senator Baucus’ proposal.  A lot will depend on the upcoming elections this November. Should the Republicans retake the Senate, leadership of the Committee will switch and a new agenda most likely will be introduced.
 
House Ways & Means Committee: Lacking Broad Support
Introduction of Camp’s tax reform came without broad support.  Not only did Camp fail to gain support from his own committee members, the House also has very little interest in moving on a Bill that possibly would upset so many constituents.  U.S. businesses who participated in good faith along with elected Representatives by providing ideas that could drive comprehensive tax reform were all surprised when Camp, unilaterally, moved the draft proposal out of Committee.  Representative Camp announced earlier this year that he too will not be seeking reelection, however, he committed to keep working on tax reform.
 
White House: Possible Lame Duck Situation
There is a strong possibility that the Republicans gain control of both the House and Senate this coming November. Should the Senate change control, it won’t be enough to push reform through without bipartisan support.  Additionally, should President Obama wish to move on his agenda, he too is going to need significant support from the other side of the aisle.

Remember, a bill must first be introduced to the floor of the House by approval of the Committee, then voted on by Members of the House.  The same process is performed by the Senate.  Should both separate Bills receive enough votes to pass, then the House and Senate must reconcile a Bill to present to the President, who has the authority to sign OR veto at his discretion. 
Tax reform is difficult.  Comprehensive tax reform is monumental.  We have a Congress who finds it arduous to agree on almost anything presented before them.  1031 like-kind exchanges, whether simultaneous or deferred, most likely, will not be on the chopping block come November of 2014.  Nor do I think LKEs will be legislated away in the next few years – at least without a fight.  Too many employers, associations, service industries, congressmen and women, recognize 1031s are a vital tool in the US economy.

Internal Revenue Code Section 1031
The ability to do an exchange of like-kind property and to receive tax deferral on the gain has been provided for in Internal Revenue Code (IRC) Section 1031 since 1921.  The primary reason behind Section 1031 is that if a taxpayer, who is known as an exchanger, is vested with a parcel of real estate and receives different real estate in a trade, and no cash, there is a continuity of the real estate holding.  The gain on the sale of the first property, the “Relinquished Property” is deferred until the acquired property, the “Replacement Property” is sold without a further exchange.  It was generally understood that the very definition of “exchange” meant that the transfer of the relinquished property and the acquisition of the replacement property had to take place simultaneously.  Also, the taxpayer had to receive the replacement property from the same person to whom the taxpayer sold the relinquished property.  As a result, exchanges were not often done.
The Starker Decision
This notion that an exchange had to be simultaneous was set aside in 1983 in a landmark legal decision, Starker vs. U.S. In that case the parties had agreed that the buyer would acquire Starker’s property up front but would allow Starker up to five years to find replacement property for the buyer to acquire and transfer back to Starker.  The court held in favor of Starker and this began the era of doing exchanges on a delayed basis, often referred to as Starker exchanges or Starker trusts.  In 1984, in response to the Starker decision, Congress added language to Section 1031 requiring that an exchange of relinquished property for replacement property had to be concluded within 180 days, allowing for these delayed exchanges.
1991 Treasury Department Regulations
During the course of several years after the Starker decision, due to a large amount of uncertainty about how to accomplish an exchange, the Treasury Department issued regulations in 1991 to address many of the unanswered questions (see Internal Revenue Service Regulations: IRC§1031). A portion of those regulations dealt with exchanges of real estate.  Key provisions of the regulations provided a means for a taxpayer to sell relinquished property to a buyer of choice and to receive replacement property in exchange from a seller of choice, without requiring the taxpayer’s buyer to participate or cooperate in the exchange transaction.  This was accomplished by the use of an “intermediary” to facilitate the exchange.  The intermediary acquires the relinquished property from the taxpayer, transfers it to the buyer and within 180 days, acquires replacement property from the seller and transfers it to the taxpayer.  The taxpayer is deemed to have completed an exchange with its intermediary.  Under the regulations, certain persons or entities who are the agent of the taxpayer cannot act as Intermediary, but all other persons or entities are “qualified” to act as Intermediary and these persons are referred to as a “qualified intermediary”, commonly referred to as a QI. 
Retaining the Services of a Qualified Intermediary
A QI is a necessity for delayed exchanges and the use of one allows the taxpayer to fall into a “safe harbor” as to the structure of the transaction.  The regulations are purposely liberal on the mechanics of transferring the relinquished property to the QI and how to receive title to the replacement property back from the QI.  One such permitted method, which is the industry standard, is to “assign rights” in the sale and purchase contracts to the QI.  For tax purposes, the QI’s right to receive the property resulting from the assignment of rights is the same as if the QI took title from the taxpayer on the relinquished property and transferred title to the taxpayer on the replacement property.  The taxpayer can still “direct deed” the property to the buyer and receive a deed from the seller.  There are a few other requirements as well to meet this safe harbor.
A second problem was also addressed by the regulations. Prior to the regulations, to the extent that the taxpayer received and held the sale proceeds until being used for the purchase of the replacement property, the taxpayer was deemed to have a taxable sale, regardless if replacement property was bought within the 180 day time period.  For a variety of reasons, the other option, like in the Starker case, allowing the buyer to hold those proceeds until the taxpayer needed to have them applied to the purchase of the replacement property was a risky proposition.  So the regulations provided an additional “safe harbor” by allowing the QI to hold the funds or for the funds to be held in an escrow or trust account by a QI affiliate or by a third party.  So a proper exchange then and now looks something like this:

 
Current Requirements of a 1031 Exchange
The 1991 regulations still cover how to complete an exchange to this day.  Based upon the foregoing, documents such as the following are common to exchanges using a Qualified Intermediary:

Tax Deferred Exchange Agreement
Assignment of Contract Rights to Sell Relinquished Property
Identification Notice from taxpayer to QI within 45 days of the sale of the Relinquished Property designating up to three properties the taxpayer may elect to acquire (additional designation rules may be applicable)
Assignment of Contract Rights to Acquire the Replacement Property

Summary
Not only have tax deferred exchanges been permissible by the IRS since 1921, the ability to effectuate an exchange has been made much easier as a result of the decision in the Starker case and the regulations that followed.  Those regulations, among other things, provide safe harbors for engaging the services of a QI with whom the taxpayer completes the exchange and for parties to hold the funds outside the control of the taxpayer.  The 1031 exchange procedures are very form oriented and as long as the taxpayer, with the help of its QI, strictly follows the procedures, tax deferral upon the sale of real estate can be realized.

Internal Revenue Code Section 1031
The ability to do an exchange of like-kind property and to receive tax deferral on the gain has been provided for in Internal Revenue Code (IRC) Section 1031 since 1921.  The primary reason behind Section 1031 is that if a taxpayer, who is known as an exchanger, is vested with a parcel of real estate and receives different real estate in a trade, and no cash, there is a continuity of the real estate holding.  The gain on the sale of the first property, the “Relinquished Property” is deferred until the acquired property, the “Replacement Property” is sold without a further exchange.  It was generally understood that the very definition of “exchange” meant that the transfer of the relinquished property and the acquisition of the replacement property had to take place simultaneously.  Also, the taxpayer had to receive the replacement property from the same person to whom the taxpayer sold the relinquished property.  As a result, exchanges were not often done.
The Starker Decision
This notion that an exchange had to be simultaneous was set aside in 1983 in a landmark legal decision, Starker vs. U.S. In that case the parties had agreed that the buyer would acquire Starker’s property up front but would allow Starker up to five years to find replacement property for the buyer to acquire and transfer back to Starker.  The court held in favor of Starker and this began the era of doing exchanges on a delayed basis, often referred to as Starker exchanges or Starker trusts.  In 1984, in response to the Starker decision, Congress added language to Section 1031 requiring that an exchange of relinquished property for replacement property had to be concluded within 180 days, allowing for these delayed exchanges.
1991 Treasury Department Regulations
During the course of several years after the Starker decision, due to a large amount of uncertainty about how to accomplish an exchange, the Treasury Department issued regulations in 1991 to address many of the unanswered questions (see Internal Revenue Service Regulations: IRC§1031). A portion of those regulations dealt with exchanges of real estate.  Key provisions of the regulations provided a means for a taxpayer to sell relinquished property to a buyer of choice and to receive replacement property in exchange from a seller of choice, without requiring the taxpayer’s buyer to participate or cooperate in the exchange transaction.  This was accomplished by the use of an “intermediary” to facilitate the exchange.  The intermediary acquires the relinquished property from the taxpayer, transfers it to the buyer and within 180 days, acquires replacement property from the seller and transfers it to the taxpayer.  The taxpayer is deemed to have completed an exchange with its intermediary.  Under the regulations, certain persons or entities who are the agent of the taxpayer cannot act as Intermediary, but all other persons or entities are “qualified” to act as Intermediary and these persons are referred to as a “qualified intermediary”, commonly referred to as a QI. 
Retaining the Services of a Qualified Intermediary
A QI is a necessity for delayed exchanges and the use of one allows the taxpayer to fall into a “safe harbor” as to the structure of the transaction.  The regulations are purposely liberal on the mechanics of transferring the relinquished property to the QI and how to receive title to the replacement property back from the QI.  One such permitted method, which is the industry standard, is to “assign rights” in the sale and purchase contracts to the QI.  For tax purposes, the QI’s right to receive the property resulting from the assignment of rights is the same as if the QI took title from the taxpayer on the relinquished property and transferred title to the taxpayer on the replacement property.  The taxpayer can still “direct deed” the property to the buyer and receive a deed from the seller.  There are a few other requirements as well to meet this safe harbor.
A second problem was also addressed by the regulations. Prior to the regulations, to the extent that the taxpayer received and held the sale proceeds until being used for the purchase of the replacement property, the taxpayer was deemed to have a taxable sale, regardless if replacement property was bought within the 180 day time period.  For a variety of reasons, the other option, like in the Starker case, allowing the buyer to hold those proceeds until the taxpayer needed to have them applied to the purchase of the replacement property was a risky proposition.  So the regulations provided an additional “safe harbor” by allowing the QI to hold the funds or for the funds to be held in an escrow or trust account by a QI affiliate or by a third party.  So a proper exchange then and now looks something like this:

 
Current Requirements of a 1031 Exchange
The 1991 regulations still cover how to complete an exchange to this day.  Based upon the foregoing, documents such as the following are common to exchanges using a Qualified Intermediary:

Tax Deferred Exchange Agreement
Assignment of Contract Rights to Sell Relinquished Property
Identification Notice from taxpayer to QI within 45 days of the sale of the Relinquished Property designating up to three properties the taxpayer may elect to acquire (additional designation rules may be applicable)
Assignment of Contract Rights to Acquire the Replacement Property

Summary
Not only have tax deferred exchanges been permissible by the IRS since 1921, the ability to effectuate an exchange has been made much easier as a result of the decision in the Starker case and the regulations that followed.  Those regulations, among other things, provide safe harbors for engaging the services of a QI with whom the taxpayer completes the exchange and for parties to hold the funds outside the control of the taxpayer.  The 1031 exchange procedures are very form oriented and as long as the taxpayer, with the help of its QI, strictly follows the procedures, tax deferral upon the sale of real estate can be realized.

Internal Revenue Code Section 1031
The ability to do an exchange of like-kind property and to receive tax deferral on the gain has been provided for in Internal Revenue Code (IRC) Section 1031 since 1921.  The primary reason behind Section 1031 is that if a taxpayer, who is known as an exchanger, is vested with a parcel of real estate and receives different real estate in a trade, and no cash, there is a continuity of the real estate holding.  The gain on the sale of the first property, the “Relinquished Property” is deferred until the acquired property, the “Replacement Property” is sold without a further exchange.  It was generally understood that the very definition of “exchange” meant that the transfer of the relinquished property and the acquisition of the replacement property had to take place simultaneously.  Also, the taxpayer had to receive the replacement property from the same person to whom the taxpayer sold the relinquished property.  As a result, exchanges were not often done.
The Starker Decision
This notion that an exchange had to be simultaneous was set aside in 1983 in a landmark legal decision, Starker vs. U.S. In that case the parties had agreed that the buyer would acquire Starker’s property up front but would allow Starker up to five years to find replacement property for the buyer to acquire and transfer back to Starker.  The court held in favor of Starker and this began the era of doing exchanges on a delayed basis, often referred to as Starker exchanges or Starker trusts.  In 1984, in response to the Starker decision, Congress added language to Section 1031 requiring that an exchange of relinquished property for replacement property had to be concluded within 180 days, allowing for these delayed exchanges.
1991 Treasury Department Regulations
During the course of several years after the Starker decision, due to a large amount of uncertainty about how to accomplish an exchange, the Treasury Department issued regulations in 1991 to address many of the unanswered questions (see Internal Revenue Service Regulations: IRC§1031). A portion of those regulations dealt with exchanges of real estate.  Key provisions of the regulations provided a means for a taxpayer to sell relinquished property to a buyer of choice and to receive replacement property in exchange from a seller of choice, without requiring the taxpayer’s buyer to participate or cooperate in the exchange transaction.  This was accomplished by the use of an “intermediary” to facilitate the exchange.  The intermediary acquires the relinquished property from the taxpayer, transfers it to the buyer and within 180 days, acquires replacement property from the seller and transfers it to the taxpayer.  The taxpayer is deemed to have completed an exchange with its intermediary.  Under the regulations, certain persons or entities who are the agent of the taxpayer cannot act as Intermediary, but all other persons or entities are “qualified” to act as Intermediary and these persons are referred to as a “qualified intermediary”, commonly referred to as a QI. 
Retaining the Services of a Qualified Intermediary
A QI is a necessity for delayed exchanges and the use of one allows the taxpayer to fall into a “safe harbor” as to the structure of the transaction.  The regulations are purposely liberal on the mechanics of transferring the relinquished property to the QI and how to receive title to the replacement property back from the QI.  One such permitted method, which is the industry standard, is to “assign rights” in the sale and purchase contracts to the QI.  For tax purposes, the QI’s right to receive the property resulting from the assignment of rights is the same as if the QI took title from the taxpayer on the relinquished property and transferred title to the taxpayer on the replacement property.  The taxpayer can still “direct deed” the property to the buyer and receive a deed from the seller.  There are a few other requirements as well to meet this safe harbor.
A second problem was also addressed by the regulations. Prior to the regulations, to the extent that the taxpayer received and held the sale proceeds until being used for the purchase of the replacement property, the taxpayer was deemed to have a taxable sale, regardless if replacement property was bought within the 180 day time period.  For a variety of reasons, the other option, like in the Starker case, allowing the buyer to hold those proceeds until the taxpayer needed to have them applied to the purchase of the replacement property was a risky proposition.  So the regulations provided an additional “safe harbor” by allowing the QI to hold the funds or for the funds to be held in an escrow or trust account by a QI affiliate or by a third party.  So a proper exchange then and now looks something like this:

 
Current Requirements of a 1031 Exchange
The 1991 regulations still cover how to complete an exchange to this day.  Based upon the foregoing, documents such as the following are common to exchanges using a Qualified Intermediary:

Tax Deferred Exchange Agreement
Assignment of Contract Rights to Sell Relinquished Property
Identification Notice from taxpayer to QI within 45 days of the sale of the Relinquished Property designating up to three properties the taxpayer may elect to acquire (additional designation rules may be applicable)
Assignment of Contract Rights to Acquire the Replacement Property

Summary
Not only have tax deferred exchanges been permissible by the IRS since 1921, the ability to effectuate an exchange has been made much easier as a result of the decision in the Starker case and the regulations that followed.  Those regulations, among other things, provide safe harbors for engaging the services of a QI with whom the taxpayer completes the exchange and for parties to hold the funds outside the control of the taxpayer.  The 1031 exchange procedures are very form oriented and as long as the taxpayer, with the help of its QI, strictly follows the procedures, tax deferral upon the sale of real estate can be realized.

Despite the fact that like-kind exchanges (LKEs) have been an established part of tax law since 1921, there are still a number of misconceptions in the marketplace about what they are and how they work.
The 1031 Code is specific concerning most aspects of the law and Accruit is always standing ready with accurate, detailed information regarding any questions you may have about 1031 exchanges. If you hear something that you’re not sure about or would like more details on an LKE issue, call Accruit at 1-866-397-1031.
In the meantime, we’ve prepared this brief, which addresses many common 1031 exchange misconceptions.
A 1031 exchange requires that you swap property simultaneously.
There is no requirement that you must exchange property simultaneously. In the most common case, the “single” or “forward delayed” exchange, property is sold and replacement property is purchased within 180 days following the sale of the relinquished property. There is also a “reverse exchange,” where the replacement property is purchased before the sale of the relinquished property.
You must purchase the same type of property to meet “like-kind” rules for a 1031 exchange.
Any real estate property is “like-kind” to all other real estate under 1031 guidelines. Therefore, a mall property can be like-kind to a resort property and a high-rise apartment can be like-kind to a vacant piece of land. Your Accruit representative can provide you with the guidelines you need to determine specifically what asset types are like-kind for your situation.
I can use my attorney, CPA, realtor or my equipment dealer as a Qualified Intermediary.
A “qualified intermediary” (QI) provides Safe Harbor protection for 1031 exchanges, and this entity must be a “disinterested third party” who has not acted as your agent in any way. You can’t use a lawyer with whom you’ve had an attorney-client relationship in the preceding two years, nor can your CPA serve as the QI if he or she has prepared your tax return within the last two years. An equipment dealer who sells you equipment is not a disinterested party as described in the tax code, so they can’t be your QI, either.
If you don’t employ a qualified intermediary, your exchange may be disqualified by the IRS. It’s also important that you are utilizing an appropriate QI when executing an exchange through an auction house. The auctioneer isn’t legally a disinterested party if they assisted you in your sale; they are by definition the agent for the buyer and/or the seller.
Any complications with the sale of real property or a business asset can extend the 180-day rule.
In general, there are no provisions to extend the 45-day or the 180-day rules. Nor can you extend the deadline because your 180th day is on a Sunday. In that case, you must finish the exchange on the previous Friday, even though this falls before the 180-day deadline.
A singular exception is when a presidential order extends these deadlines in cases of regional or national emergencies. A good example would be a natural disaster, like a major hurricane or widespread flooding.
Once I have done a 1031 exchange, I never have to pay my taxes.
A 1031 exchange is a tax deferral strategy, which means taxes are deferred for an undetermined period of time. Through continued 1031 planning, it may be possible to turn this tax deferral into long-term or indefinite tax deferral.
There are also occasions under the law when a deceased person leaves property to another family member and the heirs may avoid capital gains completely. It is important to consult with a tax attorney or CPA to determine the application of the tax code in these instances.
Vacant land doesn’t qualify for a 1031 exchange.
A 1031 exchange involves real property for real property and vacant land certainly qualifies under this description. If, for some reason, you believe your situation represents an unusual exception, you’re encouraged to consult with your tax advisor for clarification.
A 1031 exchange defers all tax liability.
Any cash not spent on the purchase of a replacement property during an exchange (which is called “boot”) is fully taxable, regardless of your adjusted basis on the property. You may have to pay tax regardless of the 1031 exchange.
The 1031 exchange is a tax loophole.
LKEs have been a part of the Internal Revenue Code since 1921. They’re a legal tax deferral strategy specifically crafted to aid businesses in expansion and to stimulate sales and purchases of real estate and tangible business assets. Section 1031 is not a loophole, a dodge or a way around the law – it is the law. It’s the same as the standard deduction you claim for a dependent child or the depreciation deduction you take in your business each year.
A 1031 exchange is just too good to be true.
This myth is the most frustrating of them all. In our business we often encounter those who believe that if it sounds too good to be true, then it probably is. We respect prudent caution, but in this case the suspicion emanates from a failure to understand what a 1031 exchange actually is and does.
Yes, LKEs sound really good, and the black-letter fact of the law is that they are true.

Despite the fact that like-kind exchanges (LKEs) have been an established part of tax law since 1921, there are still a number of misconceptions in the marketplace about what they are and how they work.
The 1031 Code is specific concerning most aspects of the law and Accruit is always standing ready with accurate, detailed information regarding any questions you may have about 1031 exchanges. If you hear something that you’re not sure about or would like more details on an LKE issue, call Accruit at 1-866-397-1031.
In the meantime, we’ve prepared this brief, which addresses many common 1031 exchange misconceptions.
A 1031 exchange requires that you swap property simultaneously.
There is no requirement that you must exchange property simultaneously. In the most common case, the “single” or “forward delayed” exchange, property is sold and replacement property is purchased within 180 days following the sale of the relinquished property. There is also a “reverse exchange,” where the replacement property is purchased before the sale of the relinquished property.
You must purchase the same type of property to meet “like-kind” rules for a 1031 exchange.
Any real estate property is “like-kind” to all other real estate under 1031 guidelines. Therefore, a mall property can be like-kind to a resort property and a high-rise apartment can be like-kind to a vacant piece of land. Your Accruit representative can provide you with the guidelines you need to determine specifically what asset types are like-kind for your situation.
I can use my attorney, CPA, realtor or my equipment dealer as a Qualified Intermediary.
A “qualified intermediary” (QI) provides Safe Harbor protection for 1031 exchanges, and this entity must be a “disinterested third party” who has not acted as your agent in any way. You can’t use a lawyer with whom you’ve had an attorney-client relationship in the preceding two years, nor can your CPA serve as the QI if he or she has prepared your tax return within the last two years. An equipment dealer who sells you equipment is not a disinterested party as described in the tax code, so they can’t be your QI, either.
If you don’t employ a qualified intermediary, your exchange may be disqualified by the IRS. It’s also important that you are utilizing an appropriate QI when executing an exchange through an auction house. The auctioneer isn’t legally a disinterested party if they assisted you in your sale; they are by definition the agent for the buyer and/or the seller.
Any complications with the sale of real property or a business asset can extend the 180-day rule.
In general, there are no provisions to extend the 45-day or the 180-day rules. Nor can you extend the deadline because your 180th day is on a Sunday. In that case, you must finish the exchange on the previous Friday, even though this falls before the 180-day deadline.
A singular exception is when a presidential order extends these deadlines in cases of regional or national emergencies. A good example would be a natural disaster, like a major hurricane or widespread flooding.
Once I have done a 1031 exchange, I never have to pay my taxes.
A 1031 exchange is a tax deferral strategy, which means taxes are deferred for an undetermined period of time. Through continued 1031 planning, it may be possible to turn this tax deferral into long-term or indefinite tax deferral.
There are also occasions under the law when a deceased person leaves property to another family member and the heirs may avoid capital gains completely. It is important to consult with a tax attorney or CPA to determine the application of the tax code in these instances.
Vacant land doesn’t qualify for a 1031 exchange.
A 1031 exchange involves real property for real property and vacant land certainly qualifies under this description. If, for some reason, you believe your situation represents an unusual exception, you’re encouraged to consult with your tax advisor for clarification.
A 1031 exchange defers all tax liability.
Any cash not spent on the purchase of a replacement property during an exchange (which is called “boot”) is fully taxable, regardless of your adjusted basis on the property. You may have to pay tax regardless of the 1031 exchange.
The 1031 exchange is a tax loophole.
LKEs have been a part of the Internal Revenue Code since 1921. They’re a legal tax deferral strategy specifically crafted to aid businesses in expansion and to stimulate sales and purchases of real estate and tangible business assets. Section 1031 is not a loophole, a dodge or a way around the law – it is the law. It’s the same as the standard deduction you claim for a dependent child or the depreciation deduction you take in your business each year.
A 1031 exchange is just too good to be true.
This myth is the most frustrating of them all. In our business we often encounter those who believe that if it sounds too good to be true, then it probably is. We respect prudent caution, but in this case the suspicion emanates from a failure to understand what a 1031 exchange actually is and does.
Yes, LKEs sound really good, and the black-letter fact of the law is that they are true.

Despite the fact that like-kind exchanges (LKEs) have been an established part of tax law since 1921, there are still a number of misconceptions in the marketplace about what they are and how they work.
The 1031 Code is specific concerning most aspects of the law and Accruit is always standing ready with accurate, detailed information regarding any questions you may have about 1031 exchanges. If you hear something that you’re not sure about or would like more details on an LKE issue, call Accruit at 1-866-397-1031.
In the meantime, we’ve prepared this brief, which addresses many common 1031 exchange misconceptions.
A 1031 exchange requires that you swap property simultaneously.
There is no requirement that you must exchange property simultaneously. In the most common case, the “single” or “forward delayed” exchange, property is sold and replacement property is purchased within 180 days following the sale of the relinquished property. There is also a “reverse exchange,” where the replacement property is purchased before the sale of the relinquished property.
You must purchase the same type of property to meet “like-kind” rules for a 1031 exchange.
Any real estate property is “like-kind” to all other real estate under 1031 guidelines. Therefore, a mall property can be like-kind to a resort property and a high-rise apartment can be like-kind to a vacant piece of land. Your Accruit representative can provide you with the guidelines you need to determine specifically what asset types are like-kind for your situation.
I can use my attorney, CPA, realtor or my equipment dealer as a Qualified Intermediary.
A “qualified intermediary” (QI) provides Safe Harbor protection for 1031 exchanges, and this entity must be a “disinterested third party” who has not acted as your agent in any way. You can’t use a lawyer with whom you’ve had an attorney-client relationship in the preceding two years, nor can your CPA serve as the QI if he or she has prepared your tax return within the last two years. An equipment dealer who sells you equipment is not a disinterested party as described in the tax code, so they can’t be your QI, either.
If you don’t employ a qualified intermediary, your exchange may be disqualified by the IRS. It’s also important that you are utilizing an appropriate QI when executing an exchange through an auction house. The auctioneer isn’t legally a disinterested party if they assisted you in your sale; they are by definition the agent for the buyer and/or the seller.
Any complications with the sale of real property or a business asset can extend the 180-day rule.
In general, there are no provisions to extend the 45-day or the 180-day rules. Nor can you extend the deadline because your 180th day is on a Sunday. In that case, you must finish the exchange on the previous Friday, even though this falls before the 180-day deadline.
A singular exception is when a presidential order extends these deadlines in cases of regional or national emergencies. A good example would be a natural disaster, like a major hurricane or widespread flooding.
Once I have done a 1031 exchange, I never have to pay my taxes.
A 1031 exchange is a tax deferral strategy, which means taxes are deferred for an undetermined period of time. Through continued 1031 planning, it may be possible to turn this tax deferral into long-term or indefinite tax deferral.
There are also occasions under the law when a deceased person leaves property to another family member and the heirs may avoid capital gains completely. It is important to consult with a tax attorney or CPA to determine the application of the tax code in these instances.
Vacant land doesn’t qualify for a 1031 exchange.
A 1031 exchange involves real property for real property and vacant land certainly qualifies under this description. If, for some reason, you believe your situation represents an unusual exception, you’re encouraged to consult with your tax advisor for clarification.
A 1031 exchange defers all tax liability.
Any cash not spent on the purchase of a replacement property during an exchange (which is called “boot”) is fully taxable, regardless of your adjusted basis on the property. You may have to pay tax regardless of the 1031 exchange.
The 1031 exchange is a tax loophole.
LKEs have been a part of the Internal Revenue Code since 1921. They’re a legal tax deferral strategy specifically crafted to aid businesses in expansion and to stimulate sales and purchases of real estate and tangible business assets. Section 1031 is not a loophole, a dodge or a way around the law – it is the law. It’s the same as the standard deduction you claim for a dependent child or the depreciation deduction you take in your business each year.
A 1031 exchange is just too good to be true.
This myth is the most frustrating of them all. In our business we often encounter those who believe that if it sounds too good to be true, then it probably is. We respect prudent caution, but in this case the suspicion emanates from a failure to understand what a 1031 exchange actually is and does.
Yes, LKEs sound really good, and the black-letter fact of the law is that they are true.