Tag: 1031 Exchange Qualified Intermediary

In a sale of real estate, it’s common for the seller, the taxpayer in a 1031 exchange, to receive money down from the buyer in the sale and to carry a note for the additional sum due. The taxpayer facilitates financing for the buyer in this way to make the transaction happen. Sometimes this arrangement is entered into because both parties wish to close, but the buyer’s conventional financing is taking more time than expected. If the buyer can procure the financing from the institutional lender before the taxpayer closes on their replacement property, the note may simply be substituted for cash from the buyer’s loan. Regardless of the circumstance for seller financing, without further steps, the taxpayer’s use of the value of the note toward the purchase of the replacement property will be taxable.
In a non-exchange context there is no problem in the taxpayer carrying back a note from the buyer. However, under the exchange regulations, the actual or constructive receipt of the note would run afoul of qualified intermediary.
The taxpayer and qualified intermediary should also be careful in timing when the note is assigned to the taxpayer. There is a natural tendency to pass the note simultaneously upon receipt by the qualified intermediary of the equivalent amount of cash. After all, the client is putting into the exchange account the exact same value that is being taken out. However, because the regulations prohibit the taxpayer from the “right to receive money or other property” during the pendency of the exchange transaction, it is probably a safer practice to to assign the note to the seller simultaneously with the acquisition of the replacement property or after the replacement property has been acquired. Some qualified intermediaries will provide a form they will sign acknowledging the substitution of cash for the note with a promise to distribute the note upon the closing of the exchange account.
For more information about 1031 exchanges, contact Accruit by calling (800) 237-1031 or emailing info@accruit.com today! 

In a sale of real estate, it’s common for the seller, the taxpayer in a 1031 exchange, to receive money down from the buyer in the sale and to carry a note for the additional sum due. The taxpayer facilitates financing for the buyer in this way to make the transaction happen. Sometimes this arrangement is entered into because both parties wish to close, but the buyer’s conventional financing is taking more time than expected. If the buyer can procure the financing from the institutional lender before the taxpayer closes on their replacement property, the note may simply be substituted for cash from the buyer’s loan. Regardless of the circumstance for seller financing, without further steps, the taxpayer’s use of the value of the note toward the purchase of the replacement property will be taxable.
In a non-exchange context there is no problem in the taxpayer carrying back a note from the buyer. However, under the exchange regulations, the actual or constructive receipt of the note would run afoul of qualified intermediary.
The taxpayer and qualified intermediary should also be careful in timing when the note is assigned to the taxpayer. There is a natural tendency to pass the note simultaneously upon receipt by the qualified intermediary of the equivalent amount of cash. After all, the client is putting into the exchange account the exact same value that is being taken out. However, because the regulations prohibit the taxpayer from the “right to receive money or other property” during the pendency of the exchange transaction, it is probably a safer practice to to assign the note to the seller simultaneously with the acquisition of the replacement property or after the replacement property has been acquired. Some qualified intermediaries will provide a form they will sign acknowledging the substitution of cash for the note with a promise to distribute the note upon the closing of the exchange account.
For more information about 1031 exchanges, contact Accruit by calling (800) 237-1031 or emailing info@accruit.com today! 

In a sale of real estate, it’s common for the seller, the taxpayer in a 1031 exchange, to receive money down from the buyer in the sale and to carry a note for the additional sum due. The taxpayer facilitates financing for the buyer in this way to make the transaction happen. Sometimes this arrangement is entered into because both parties wish to close, but the buyer’s conventional financing is taking more time than expected. If the buyer can procure the financing from the institutional lender before the taxpayer closes on their replacement property, the note may simply be substituted for cash from the buyer’s loan. Regardless of the circumstance for seller financing, without further steps, the taxpayer’s use of the value of the note toward the purchase of the replacement property will be taxable.
In a non-exchange context there is no problem in the taxpayer carrying back a note from the buyer. However, under the exchange regulations, the actual or constructive receipt of the note would run afoul of qualified intermediary.
The taxpayer and qualified intermediary should also be careful in timing when the note is assigned to the taxpayer. There is a natural tendency to pass the note simultaneously upon receipt by the qualified intermediary of the equivalent amount of cash. After all, the client is putting into the exchange account the exact same value that is being taken out. However, because the regulations prohibit the taxpayer from the “right to receive money or other property” during the pendency of the exchange transaction, it is probably a safer practice to to assign the note to the seller simultaneously with the acquisition of the replacement property or after the replacement property has been acquired. Some qualified intermediaries will provide a form they will sign acknowledging the substitution of cash for the note with a promise to distribute the note upon the closing of the exchange account.
For more information about 1031 exchanges, contact Accruit by calling (800) 237-1031 or emailing info@accruit.com today! 

 No useful reason exists to think of or treat a closing like litigation although it does happen.  Everyone involved needs to work together in a cooperative way to consummate the deal.  Real estate law is a function of locality and custom in many respects; however, we will generally review some commonalities in the closing of a real estate transaction.  
Most real estate transactions begin with a written contract and end with a closing.  The following parties are typically involved in negotiating, performing and closing on the contract:

Seller
Buyer
Real estate agents
Attorneys (depending on locality and complexity)
Lender (if not a cash deal or other financing arrangement)
Title company

All agreements for the purchase and sale of real estate must be in writing.  The contract sets forth the conditions under which the seller agrees to transfer and the buyer agrees to purchase the property.  The contract may be lengthy or pithy, complex or straightforward, but its ultimate purpose is to convey ownership of the property to the buyer under mutually agreed upon terms.  
Occasionally, a real estate transaction may involve an IRC Section 1031 tax-deferred exchange. The tax code and treasury regulations also provide certain rules that address conveying real estate in a tax deferred exchange.  A qualified intermediary (QI) is generally required and is a person or entity that is not a “disqualified person” as defined under the tax code.  For the most part,

 No useful reason exists to think of or treat a closing like litigation although it does happen.  Everyone involved needs to work together in a cooperative way to consummate the deal.  Real estate law is a function of locality and custom in many respects; however, we will generally review some commonalities in the closing of a real estate transaction.  
Most real estate transactions begin with a written contract and end with a closing.  The following parties are typically involved in negotiating, performing and closing on the contract:

Seller
Buyer
Real estate agents
Attorneys (depending on locality and complexity)
Lender (if not a cash deal or other financing arrangement)
Title company

All agreements for the purchase and sale of real estate must be in writing.  The contract sets forth the conditions under which the seller agrees to transfer and the buyer agrees to purchase the property.  The contract may be lengthy or pithy, complex or straightforward, but its ultimate purpose is to convey ownership of the property to the buyer under mutually agreed upon terms.  
Occasionally, a real estate transaction may involve an IRC Section 1031 tax-deferred exchange. The tax code and treasury regulations also provide certain rules that address conveying real estate in a tax deferred exchange.  A qualified intermediary (QI) is generally required and is a person or entity that is not a “disqualified person” as defined under the tax code.  For the most part,

 No useful reason exists to think of or treat a closing like litigation although it does happen.  Everyone involved needs to work together in a cooperative way to consummate the deal.  Real estate law is a function of locality and custom in many respects; however, we will generally review some commonalities in the closing of a real estate transaction.  
Most real estate transactions begin with a written contract and end with a closing.  The following parties are typically involved in negotiating, performing and closing on the contract:

Seller
Buyer
Real estate agents
Attorneys (depending on locality and complexity)
Lender (if not a cash deal or other financing arrangement)
Title company

All agreements for the purchase and sale of real estate must be in writing.  The contract sets forth the conditions under which the seller agrees to transfer and the buyer agrees to purchase the property.  The contract may be lengthy or pithy, complex or straightforward, but its ultimate purpose is to convey ownership of the property to the buyer under mutually agreed upon terms.  
Occasionally, a real estate transaction may involve an IRC Section 1031 tax-deferred exchange. The tax code and treasury regulations also provide certain rules that address conveying real estate in a tax deferred exchange.  A qualified intermediary (QI) is generally required and is a person or entity that is not a “disqualified person” as defined under the tax code.  For the most part,

Most users of Section 1031 understand the 180-calendar day deadline to complete their like-kind exchange.  This general understanding of the exchange period deadline is fine for most transactions, but many exchangers remain unaware of the more nuanced definition of this critical period.
What do the regulations say?
Section 1031’s underlying regulations state, “The exchange period begins on the date the taxpayer transfers the relinquished property and ends at midnight on the earlier of the 180th day thereafter or the due date (including extensions) for the taxpayer’s return of tax imposed by chapter 1 of subtitle A of the Code for the taxable year in which the transfer of the relinquished property occurs.”
What do the regulations mean?
The regulations generally allow for 180 calendar days for taxpayers to complete their 1031 exchanges that straddle tax years, taxpayers may seek installment tax reporting on IRS Form 6252 in the year of the relinquished property sale.  For instance, if the relinquished property closed between November 16 and December 31, the 45-day identification would be in the following calendar year.  Similarly, if the relinquished property closed after July 5, and potential replacement property was identified within the 45-day identification period but no replacement property was actually acquired, the end of the exchange period would be in the following calendar year.  If the 1031 exchange fails by non-identification or by failure to purchase a replacement property, the sale proceeds would be returned to the exchanger in a different tax reporting year.  In this circumstance, the IRS allows taxpayers to either report the gain in the year of sale or in the year the proceeds were received under IRC 453 installment sale rules.  This would allow the taxpayer to select the year of reporting that is most beneficial.  One might say that a year’s worth of tax deferral is available regardless of the exchange having failed.
Taxpayers Beware
Installment sale treatment generally requires a bona fide intent to complete an exchange.  This means that the taxpayer had reason to believe, based on the facts and circumstances at the beginning of the exchange, that a like-kind replacement property would be acquired during the exchange period.
Other installment sale issues:

If there was debt paid off at closing of the relinquished property and gain associated with this debt, relief is generally recognized in the year of sale. 
Depreciation recapture under section 1245 or 1250 is taxable as ordinary income in the year of sale.
Interest is charged on the tax deferred if the sale price of the relinquished property is over $150,000 and certain other instalment obligations exceed $5 million.

For taxpayers who have a taxable gain, there is one additional issue to consider.  If you are unsettled about current tax rates, you may extend your tax return to report by October 15.  This way, you can wait and see if the Congress will change the rates and select the year of reporting that is most beneficial for you.
Check with your tax advisor to determine the correct tax forms and tax extensions to utilize along with the selection of the reporting year for your exchange.