Category: 1031 Exchange General

Education has always been a key component of the like-kind exchange (LKE) industry and frankly, it has always been one of the more enjoyable parts of my job. Despite the fact that the 1031 exchange business focuses on a very narrow part of the tax code, there will always be significant challenges associated with anything that involves the IRS. So for this month’s 1031 Tips, I’m stepping back and reexamining the most basic type of 1031 exchange, the simultaneous LKE, also known as the “swap.”

The oldest form of exchange, the simultaneous LKE can take on three basic forms:

Two-party swap format, without the use of a Qualified Intermediary (QI)
Three-party format, without the use of a QI
Two or three-party format, with a QI

For the purposes of this article, I’ll stick to the two-party swap format.
Three-party LKEs can be structured without the use of a QI, but the accommodating party is potentially exposed to liability issues related to property they have little information about. This potential exposure makes three-party LKEs without the use of a QI, a rare (and risky) occurrence.
On the other hand, the two-party swap format represents an exchange in its most understandable and unadulterated form. Structured as a true trade, the ownership transfers must occur simultaneously with care taken in order to account for each property’s respective fair market values to ensure tax liabilities are fully deferred. Furthermore, since the two properties don’t usually share the same fair market values, cash or other property used as part of the purchase / sale price must be carefully delivered directly to the other party.
The two-party swap is illustrated as follows:

 
 
 
 
 
 
 
 
 
 
Two-party swaps can be a great way to keep an LKE simple and cost effective. However, what may begin as a simple swap can quickly evolve to suit the circumstances of the seller (exchanger) and / or buyer. It’s these variable circumstances that can move the transaction beyond the requirements for a successful LKE. The old saying goes that the devil’s in the details, and LKEs are heavily dependent on the proper transaction form. Any deviations from that form can be fatal to the exchange.
Assuming the properties qualify for LKE treatment, the primary threat to the exchange lies in delays. Delays in ownership transfers (or the delivery of cash or other considerations) can have a profoundly negative impact on the integrity of the two-party swap, so proper planning is vital. This planning is especially important if you’re involved in a dealer trade-in or a pass-through transaction. In some instances, pass-throughs and trade-ins can fall outside the prescribed format, requiring the use of a QI. In other cases, where the two-party swap format doesn’t require the use of a QI, exchangers may choose to involve one in the transaction. In doing so, they add some very important elements to the LKE:

An experienced, knowledgeable professional.
An approved “Safe Harbor” component.

Exchangers should be very careful regarding transactions that position the dealer as the QI. There are very specific rules within the tax code prohibiting the use of an individual / entity that has a recent agency relationship with the exchanger.

A safety net against LKE-destroying occurrences, such as:

Actual receipt or constructive receipt of funds (this is especially important if the values of the traded properties are not equal).
Delays in the sequential transfer of the properties.

In other words, simultaneous exchanges are legal and valid, but they can expose you to significant liability if they’re conducted improperly. The best way to assure that your swap complies with Section 1031 is to begin the planning process by calling a QI. At Accruit, we don’t charge any fees to discuss the proposed transaction, and our Exchange Operations team can provide you with an honest appraisal of the transaction’s integrity, including whether or not you should use a QI.
Short version: make a call with your QI a prerequisite step in your due diligence process. You won’t regret it.

Exchangers frequently inquire about when they may receive all, or part of their exchange proceeds back. It is a question I have been asked countless times, and in certain circumstances giving the right answer can be difficult. We’re talking, after all, about the proceeds from the exchanger’s sale, and sometimes the need for their return is pressing. Regardless of the need, though, there are very rigid regulations regarding when qualified intermediaries (QIs) can release a client’s exchange proceeds. Those same regulations make no provision for how badly those funds may be needed for purposes outside a properly structured like-kind exchange (LKE).

Given the incredible benefits that LKEs afford and the tight restrictions regarding their application, it’s important to understand how and when exchangers can get their proceeds back.
Let’s begin with the exchange agreement. Signed at the start of the LKE, the agreement must explicitly state the restrictions on an exchanger’s “rights to receive, pledge, borrow, or otherwise obtain the benefits of money, or other property before the end of the exchange period.” Within the LKE industry, these limitations are referred to as the (g)(6) limitations, after United States Treasury Regulation 1.1031(k)-(1)(g)(6). The language within a properly worded agreement must be clear, read and understood, prior to execution by the exchanger.
Within a properly written agreement, it is fairly easy to understand the limitations on the exchanger’s rights mentioned above. What’s not always readily understood is the definition of the exchange period. Officially this period begins on the date the ownership of the relinquished property is legally transferred to the buyer(s) and officially ends with one of the following triggering events:

The expiration of the 45-day identification period if the exchanger has either,

failed to identify replacement property(s) or,
properly revoked the previously submitted identification form, or
after properly identifying replacement property(s) and without revocation, encounters a “material and substantial” contingency preventing the purchase of the identified replacement property(s), or

The receipt, by the exchanger, of ALL of the properly identified replacement property(s), or
At the expiration of the 180-day completion period.

What this means is that the earliest day exchange proceeds may be returned to the exchanger is on day 46. There is simply no avenue available for the exchanger to terminate the LKE and receive the proceeds before the 45 days pass. Furthermore, after proper identification and the passing of the first 45-day deadline, if an exchanger does not purchase the identified replacement property(s), the exchanger must wait until the full 180-day exchange period expires to receive the remaining funds.
Exchangers should be very careful about claiming that a material and substantial contingency has prevented the purchase of the properly identified replacement property(s). This exemption may only be claimed after identification has been made and the 45-day date has passed. In addition, the proper application of the contingency demands a very careful analysis of the nature and character of the event by an experienced tax advisor. Even within that context, a careful QI will not release funds for a material and substantial contingency without coordinating with its own legal advisor.
In summary, it’s very important to know your options before signing an exchange agreement. A QI with a comprehensive approach will explain the (g)(6) limitations in a manner that makes them easily understood. We also strongly encourage you to beware of “overly accommodating accommodators” – a QI who’s willing to play fast and loose with the letter of the law is placing your business in jeopardy. Accruit doesn’t strictly adhere to the tax code just for our own protection, we do it because it’s in your best interests, as well.
As a general rule, always have your tax advisor review the exchange agreement prior to signing. By working together, the QI and the tax advisor will be able to give you a clear picture of all the timing issues related to an LKE.

Exchangers frequently inquire about when they may receive all, or part of their exchange proceeds back. It is a question I have been asked countless times, and in certain circumstances giving the right answer can be difficult. We’re talking, after all, about the proceeds from the exchanger’s sale, and sometimes the need for their return is pressing. Regardless of the need, though, there are very rigid regulations regarding when qualified intermediaries (QIs) can release a client’s exchange proceeds. Those same regulations make no provision for how badly those funds may be needed for purposes outside a properly structured like-kind exchange (LKE).

Given the incredible benefits that LKEs afford and the tight restrictions regarding their application, it’s important to understand how and when exchangers can get their proceeds back.
Let’s begin with the exchange agreement. Signed at the start of the LKE, the agreement must explicitly state the restrictions on an exchanger’s “rights to receive, pledge, borrow, or otherwise obtain the benefits of money, or other property before the end of the exchange period.” Within the LKE industry, these limitations are referred to as the (g)(6) limitations, after United States Treasury Regulation 1.1031(k)-(1)(g)(6). The language within a properly worded agreement must be clear, read and understood, prior to execution by the exchanger.
Within a properly written agreement, it is fairly easy to understand the limitations on the exchanger’s rights mentioned above. What’s not always readily understood is the definition of the exchange period. Officially this period begins on the date the ownership of the relinquished property is legally transferred to the buyer(s) and officially ends with one of the following triggering events:

The expiration of the 45-day identification period if the exchanger has either,

failed to identify replacement property(s) or,
properly revoked the previously submitted identification form, or
after properly identifying replacement property(s) and without revocation, encounters a “material and substantial” contingency preventing the purchase of the identified replacement property(s), or

The receipt, by the exchanger, of ALL of the properly identified replacement property(s), or
At the expiration of the 180-day completion period.

What this means is that the earliest day exchange proceeds may be returned to the exchanger is on day 46. There is simply no avenue available for the exchanger to terminate the LKE and receive the proceeds before the 45 days pass. Furthermore, after proper identification and the passing of the first 45-day deadline, if an exchanger does not purchase the identified replacement property(s), the exchanger must wait until the full 180-day exchange period expires to receive the remaining funds.
Exchangers should be very careful about claiming that a material and substantial contingency has prevented the purchase of the properly identified replacement property(s). This exemption may only be claimed after identification has been made and the 45-day date has passed. In addition, the proper application of the contingency demands a very careful analysis of the nature and character of the event by an experienced tax advisor. Even within that context, a careful QI will not release funds for a material and substantial contingency without coordinating with its own legal advisor.
In summary, it’s very important to know your options before signing an exchange agreement. A QI with a comprehensive approach will explain the (g)(6) limitations in a manner that makes them easily understood. We also strongly encourage you to beware of “overly accommodating accommodators” – a QI who’s willing to play fast and loose with the letter of the law is placing your business in jeopardy. Accruit doesn’t strictly adhere to the tax code just for our own protection, we do it because it’s in your best interests, as well.
As a general rule, always have your tax advisor review the exchange agreement prior to signing. By working together, the QI and the tax advisor will be able to give you a clear picture of all the timing issues related to an LKE.

Exchangers frequently inquire about when they may receive all, or part of their exchange proceeds back. It is a question I have been asked countless times, and in certain circumstances giving the right answer can be difficult. We’re talking, after all, about the proceeds from the exchanger’s sale, and sometimes the need for their return is pressing. Regardless of the need, though, there are very rigid regulations regarding when qualified intermediaries (QIs) can release a client’s exchange proceeds. Those same regulations make no provision for how badly those funds may be needed for purposes outside a properly structured like-kind exchange (LKE).

Given the incredible benefits that LKEs afford and the tight restrictions regarding their application, it’s important to understand how and when exchangers can get their proceeds back.
Let’s begin with the exchange agreement. Signed at the start of the LKE, the agreement must explicitly state the restrictions on an exchanger’s “rights to receive, pledge, borrow, or otherwise obtain the benefits of money, or other property before the end of the exchange period.” Within the LKE industry, these limitations are referred to as the (g)(6) limitations, after United States Treasury Regulation 1.1031(k)-(1)(g)(6). The language within a properly worded agreement must be clear, read and understood, prior to execution by the exchanger.
Within a properly written agreement, it is fairly easy to understand the limitations on the exchanger’s rights mentioned above. What’s not always readily understood is the definition of the exchange period. Officially this period begins on the date the ownership of the relinquished property is legally transferred to the buyer(s) and officially ends with one of the following triggering events:

The expiration of the 45-day identification period if the exchanger has either,

failed to identify replacement property(s) or,
properly revoked the previously submitted identification form, or
after properly identifying replacement property(s) and without revocation, encounters a “material and substantial” contingency preventing the purchase of the identified replacement property(s), or

The receipt, by the exchanger, of ALL of the properly identified replacement property(s), or
At the expiration of the 180-day completion period.

What this means is that the earliest day exchange proceeds may be returned to the exchanger is on day 46. There is simply no avenue available for the exchanger to terminate the LKE and receive the proceeds before the 45 days pass. Furthermore, after proper identification and the passing of the first 45-day deadline, if an exchanger does not purchase the identified replacement property(s), the exchanger must wait until the full 180-day exchange period expires to receive the remaining funds.
Exchangers should be very careful about claiming that a material and substantial contingency has prevented the purchase of the properly identified replacement property(s). This exemption may only be claimed after identification has been made and the 45-day date has passed. In addition, the proper application of the contingency demands a very careful analysis of the nature and character of the event by an experienced tax advisor. Even within that context, a careful QI will not release funds for a material and substantial contingency without coordinating with its own legal advisor.
In summary, it’s very important to know your options before signing an exchange agreement. A QI with a comprehensive approach will explain the (g)(6) limitations in a manner that makes them easily understood. We also strongly encourage you to beware of “overly accommodating accommodators” – a QI who’s willing to play fast and loose with the letter of the law is placing your business in jeopardy. Accruit doesn’t strictly adhere to the tax code just for our own protection, we do it because it’s in your best interests, as well.
As a general rule, always have your tax advisor review the exchange agreement prior to signing. By working together, the QI and the tax advisor will be able to give you a clear picture of all the timing issues related to an LKE.

The Virginia state legislature has approved a new law governing the activities of qualified intermediaries and the state’s governor, Bob McDonnell, has signed the act into law. The Virginia Exchange Facilitator Act (Virginia House Bill 417) is patterned largely after the Federation of Exchange Accommodators Model Act and will become effective on July 1.
You can review the text of the Virginia Exchange Facilitator Act here. You can also find important information on other state and federal regulations that may affect your business by visiting our Resource Library page.

The Virginia state legislature has approved a new law governing the activities of qualified intermediaries and the state’s governor, Bob McDonnell, has signed the act into law. The Virginia Exchange Facilitator Act (Virginia House Bill 417) is patterned largely after the Federation of Exchange Accommodators Model Act and will become effective on July 1.
You can review the text of the Virginia Exchange Facilitator Act here. You can also find important information on other state and federal regulations that may affect your business by visiting our Resource Library page.

The Virginia state legislature has approved a new law governing the activities of qualified intermediaries and the state’s governor, Bob McDonnell, has signed the act into law. The Virginia Exchange Facilitator Act (Virginia House Bill 417) is patterned largely after the Federation of Exchange Accommodators Model Act and will become effective on July 1.
You can review the text of the Virginia Exchange Facilitator Act here. You can also find important information on other state and federal regulations that may affect your business by visiting our Resource Library page.

As we reported last week, California has decided to eliminate all the provisions within AB 2640 targeting Like-Kind Exchanges (LKEs) in the state. This is good news, as these provisions were particularly unfriendly to businesses that currently, or will someday, employ qualifying exchangeable assets. In short, the measures would have eliminated the enormous benefits of LKEs in California. From an economic standpoint it makes sense to keep LKEs working for the state as their use allows a very large number of businesses to participate in a virtuous cycle of business transactions. LKEs immediately and efficiently reinvest dollars back into company operations, impacting not just their employees, but the overall health of the marketplace, too.
Given these tough economic times, taking LKEs off the table would have resulted in slower expansion, lost jobs and decreased tax rolls. Additionally, the absence of LKE treatment for older assets would have been harmful to the environment.
The Environmental Protection Agency (EPA) is charged with the oversight of emissions standards in the United States, but it’s not the only authority states look to when determining what standards to follow. California’s Air Resources Board (CARB) issues more stringent standards and many states choose to follow CARB standards rather than the EPA’s. Furthermore, California’s large marketplace gives it significant leverage in dealing with automakers, heavy equipment manufacturers and energy utilities. This enormous market leverage allows California to dictate environmental requirements to a wide array of businesses wishing to enter and stay within the state’s competitive arena.
As you can imagine, staying competitive and environmentally friendly is expensive, especially in California. In recognition of this, CARB offers a variety of incentives, which include:

Grant programs for clean on and off-road vehicles
Equipment grant programs
State financing programs
Emission credit programs

These are all great ideas, but the sale of old, environmentally unfriendly generators, vehicles and other equipment may still trigger a large tax liability. This is why LKEs are so very important, not just from an economic benefit standpoint, but (especially in California) from an environmental benefit standpoint as well. By leveraging state and federal incentives with LKEs, companies can more quickly convert from:

Fossil fuels to wind, solar and hydroelectric power
Energy inefficient to environmentally friendly infrastructure
Fossil fuel vehicles (including autos, heavy equipment, boats) to natural gas, electric, etc.

The bottom line is that environmentally targeted incentives and credits alone cannot overcome the huge capital investments required to meet escalating air standards. California made the right decision to allow businesses to continue using LKEs. In doing so, businesses will be operationally incentivized to go greener much faster, and that’s good for both the economy and the environment.

As we reported last week, California has decided to eliminate all the provisions within AB 2640 targeting Like-Kind Exchanges (LKEs) in the state. This is good news, as these provisions were particularly unfriendly to businesses that currently, or will someday, employ qualifying exchangeable assets. In short, the measures would have eliminated the enormous benefits of LKEs in California. From an economic standpoint it makes sense to keep LKEs working for the state as their use allows a very large number of businesses to participate in a virtuous cycle of business transactions. LKEs immediately and efficiently reinvest dollars back into company operations, impacting not just their employees, but the overall health of the marketplace, too.
Given these tough economic times, taking LKEs off the table would have resulted in slower expansion, lost jobs and decreased tax rolls. Additionally, the absence of LKE treatment for older assets would have been harmful to the environment.
The Environmental Protection Agency (EPA) is charged with the oversight of emissions standards in the United States, but it’s not the only authority states look to when determining what standards to follow. California’s Air Resources Board (CARB) issues more stringent standards and many states choose to follow CARB standards rather than the EPA’s. Furthermore, California’s large marketplace gives it significant leverage in dealing with automakers, heavy equipment manufacturers and energy utilities. This enormous market leverage allows California to dictate environmental requirements to a wide array of businesses wishing to enter and stay within the state’s competitive arena.
As you can imagine, staying competitive and environmentally friendly is expensive, especially in California. In recognition of this, CARB offers a variety of incentives, which include:

Grant programs for clean on and off-road vehicles
Equipment grant programs
State financing programs
Emission credit programs

These are all great ideas, but the sale of old, environmentally unfriendly generators, vehicles and other equipment may still trigger a large tax liability. This is why LKEs are so very important, not just from an economic benefit standpoint, but (especially in California) from an environmental benefit standpoint as well. By leveraging state and federal incentives with LKEs, companies can more quickly convert from:

Fossil fuels to wind, solar and hydroelectric power
Energy inefficient to environmentally friendly infrastructure
Fossil fuel vehicles (including autos, heavy equipment, boats) to natural gas, electric, etc.

The bottom line is that environmentally targeted incentives and credits alone cannot overcome the huge capital investments required to meet escalating air standards. California made the right decision to allow businesses to continue using LKEs. In doing so, businesses will be operationally incentivized to go greener much faster, and that’s good for both the economy and the environment.

As we reported last week, California has decided to eliminate all the provisions within AB 2640 targeting Like-Kind Exchanges (LKEs) in the state. This is good news, as these provisions were particularly unfriendly to businesses that currently, or will someday, employ qualifying exchangeable assets. In short, the measures would have eliminated the enormous benefits of LKEs in California. From an economic standpoint it makes sense to keep LKEs working for the state as their use allows a very large number of businesses to participate in a virtuous cycle of business transactions. LKEs immediately and efficiently reinvest dollars back into company operations, impacting not just their employees, but the overall health of the marketplace, too.
Given these tough economic times, taking LKEs off the table would have resulted in slower expansion, lost jobs and decreased tax rolls. Additionally, the absence of LKE treatment for older assets would have been harmful to the environment.
The Environmental Protection Agency (EPA) is charged with the oversight of emissions standards in the United States, but it’s not the only authority states look to when determining what standards to follow. California’s Air Resources Board (CARB) issues more stringent standards and many states choose to follow CARB standards rather than the EPA’s. Furthermore, California’s large marketplace gives it significant leverage in dealing with automakers, heavy equipment manufacturers and energy utilities. This enormous market leverage allows California to dictate environmental requirements to a wide array of businesses wishing to enter and stay within the state’s competitive arena.
As you can imagine, staying competitive and environmentally friendly is expensive, especially in California. In recognition of this, CARB offers a variety of incentives, which include:

Grant programs for clean on and off-road vehicles
Equipment grant programs
State financing programs
Emission credit programs

These are all great ideas, but the sale of old, environmentally unfriendly generators, vehicles and other equipment may still trigger a large tax liability. This is why LKEs are so very important, not just from an economic benefit standpoint, but (especially in California) from an environmental benefit standpoint as well. By leveraging state and federal incentives with LKEs, companies can more quickly convert from:

Fossil fuels to wind, solar and hydroelectric power
Energy inefficient to environmentally friendly infrastructure
Fossil fuel vehicles (including autos, heavy equipment, boats) to natural gas, electric, etc.

The bottom line is that environmentally targeted incentives and credits alone cannot overcome the huge capital investments required to meet escalating air standards. California made the right decision to allow businesses to continue using LKEs. In doing so, businesses will be operationally incentivized to go greener much faster, and that’s good for both the economy and the environment.