1031 TAX DEFERRED EXCHANGES
1031 TAX DEFERRED EXCHANGES
If you have landed on this section of our website, you have an interest in a very specialized area of our practice. We have been a national player in tax deferred exchanges for over thirty-five (35) years and we are privileged to assist you in your better understanding of the process with a myriad of detailed writings, videos, blogs and we are as close as your phone to call us with any questions you may have on tax exchanges.
We are a law firm comprised of attorneys and specialists in the area of 1031 tax deferred exchanges. In addition to our role as Qualified Intermediary for exchanges, we are highly qualified to provide current information on laws affecting tax deferred exchanges.
Tax Deferred Exchange Consultations are Free
As a real estate law firm, we generally do not provide any free consultations of any sort except for tax deferred exchanges! It’s a special area of our practice that allows us on a national basis to work with exchange clients all over the United States. In some cases, clients who are local can visit our office in Tacoma. However, more often than not, our consultations are phone or Zoom as our clients come to us from all over the world.
All you need to do is call us, text us, email us or stop by our office to set up an appointment for a full one-hour free consultation on whether a 1031 tax deferred exchange would be advantageous for you given your situation. We have over 35 years doing 1031 exchanges for clients.
Click below if you want to email our office with your questions or to set up a consultation.
Tax Deferred Exchange Fees are Fixed and Surprisingly Inexpensive
One of the first questions that always comes up when we first speak with a seller contemplating a tax deferred exchange is “what is it going to cost”? Clients frankly are surprised at how inexpensive our fees are. I often tell a client that our fee just like an extra escrow fee. And we know that it is not very much!
We perform exchange services throughout the United States. You do not need to have a different party assist you in each state. We do it all throughout the United States and you need not hire anybody else.
You do not even need to advance money to pay our small fee for your tax deferred exchange. It is an allowable cost of your exchange transaction and our fee is paid, like any other closing cost, at the closing of each exchange transaction.
Many parties that provide the professional services we do are not even attorneys. Be cautious when hiring as you want a firm that is highly qualified to serve your needs. You want a firm with many years experience. You want a firm that is insured. You want a firm that is bonded. You don’t need any surprises.
Many of our colleagues in the practice of tax deferred exchanges limit their practice to only a very limited simple or “vanilla” delayed tax deferred exchanges. However, our firm is full service we do it all including:
- Forward Delayed Tax Deferred Exchanges
- Related Party Tax Deferred Exchanges
- Reverse Improvement Tax Deferred Exchanges
- Reverse Tax Deferred Exchanges
- Improvement Tax Deferred Exchanges
- Simultaneous Tax Deferred Exchanges
Feel free to call us and obtain information about our services. Her client text deferred exchange number is 253-383-1200. Email us at email@example.com. Text us at 253-405-7637.
Detailed Written Articles on Tax Deferred Exchanges are Available Here
McFerran Law strives to provide our exchange clients with detailed up-to-date information on the tax deferred exchange rules and processes. We do so in a variety of fashions including written articles, videos, Zoom and in-person consultations.
Attached to this page, just by clicking the icon below, you will find a wealth of written articles on the tax deferred exchanges. We know, however, that they can’t answer every question or address all tax issues, so we are always ready to talk with you personally. There is never a fee for a 1031 tax deferred exchange consultation.
Capital Gains Calculator to Estimate Capital Gains Tax Right Here!!
This is for the “Do it Yourselfers”. We are always happy to assist you in calculating your estimated capital gains tax if you Do NOT complete a tax exchange, but if you want to do so yourself, we have developed and designed a calculator to assist you in that effort. Have at it.
Of course, we all know that this is just a tool for estimation purposes and doesn’t replace the valuable assistance of your Attorney or Tax Professional. We are here daily to assist you with your exchange questions. Just call 253-383-1200.
How We Assist Clients in Their 1031 Tax Deferred Exchanges
- We evaluate and provide you an opinion on the best possible methods of accomplishing your tax deferred exchange objectives.
- We work closely with, and give assistance to, your accountant, financial advisor and real estate professional to provide you with proper evaluation on whether or not an exchange is beneficial to your situation.
- Your transaction is coordinated by us to meet the strict deadlines imposed by the IRS. Our experience in this area is impeccable. We provide you with a complete written summary at the end of the transaction which will help your accountant in the preparation of your tax return.
- As attorneys, our work and your funds are fully insured. All funds are kept in separate accounts with FDIC insured institutions. We are also bonded.
- We are celebrating our 38th year of successful experience working with 1031 Of the IRS code.
- We have acted as qualified intermediaries for exchanges for clients and properties located throughout the United States.
- Typically, we serve you on a fixed fee basis and are paid from the closing of your relinquished property. You will likely be surprised by our modest fees, particularly in relation to the substantial capital gains tax you are saving.
- Your calls will always be welcome and your questions probably answer by one of our professionals assigned to serve you.
We Have 24 Professionally Produced Videos on Tax Deferred Exchanges
Our goal at McFerran Law is that clients are always informed about all the rules associated with tax exchanges. If you are actually already engaged with us working with you through the exchange process, you already know that process can last as long as a year.
We know that questions arise. We also know that issues will come up after hours or on a weekend when we may not be readily available. We have produced 24 videos that address those most important issues that occur in the exchange process.
These are not 1-2-minute short clips. These are detailed videos analyzing certain areas of the exchange process including:
- Benefits of Exchange
- Blended Used Property
- Financing in An Exchange
- Partnerships and Exchanges
- Related Party Transactions
- Vacation Home Exchanges
- Getting Money in An Exchange “Boot”
- Timelines for An Exchange
- Primary Residences and Exchanges
- Delaware Statutory Trusts
- Unmarried Couples Doing Exchange
- Vacation Property and Exchanges
- What Is an Exchange Account?
- Reverse Exchanges
- Role of Qualified Intermediaries
- Moving into Your Investment Property
- Vacation Property and Exchanges
- What Is an Exchange Account?
We Even Offer Classes on Tax Deferred Exchanges!
Many of our clients are also real estate brokers or are in the mortgage industry. They know that McFerran Law is known for offering continuing professional education classes to real estate professionals throughout the United States.
Two of our classes offered address tax deferred exchanges:
- An initial four hour Zoom class on 1031 basics provides four hours of licensing credit for a real estate licensee.
- An advanced additional 3 1/2-hour advanced Zoom class on details including more complex transactions that also offers professional credit.
All of these classes offered by our school are free and anyone can attend. You need not be a real estate broker to attend. Just click below to see our website for McFerran University.
1031 Exchange Frequently Asked questions (FAQ)
What is a Tax Deferred Exchange?
In a tax deferred exchange, a property owner trades one or more real properties for one or more other real properties and there is no federal income tax on the transaction, and often with no state income tax. In an ordinary sale transaction, the property owner is taxed on any gain realized from the sale of the property. But in an exchange, the tax on the transaction is deferred until sometime in the future, usually when the newly acquired property is sold.
Who can do an Exchange?
Exchanges can be done by individuals, trusts, corporations, partnerships, limited liability companies, or any other business entity.
What are the Disadvantages of an Exchange?
You must reinvest the net proceeds from the disposition of the relinquished property in like-kind real property rather than other types of more liquid investments, such as stocks or bonds. The like-kind real property must be identified and acquired within the short time periods set forth in the statutory language, as discussed below in “How is an Exchange Structured?”. There may be additional fees in an exchange, including attorney’s fees, accounting fees, and qualified intermediary fees. The replacement property will have a carryover tax basis from the relinquished property. This means that more taxable gain will be realized when the replacement property is later sold than would have been realized if the replacement property had been acquired through a straight purchase. In addition, if the replacement property is depreciable, the future depreciation deductions will be lower in an exchange because the tax basis of the replacement property is reduced by the gain deferred in the exchange.
How is an Exchange Structured?
Exchanges can be forward or reverse and can also include newly built improvements. In a forward exchange with a Qualified Intermediary (QI), you transfer title to the relinquished property to the buyer. The proceeds from the transfer go directly into the exchange account set up for you by the Qualified Intermediary. The proceeds are later used to purchase your replacement property, and the seller will transfer title to the replacement property directly to you. You have 45 days following the sale of the relinquished property to identify the replacement property to the QI in writing. You must acquire the replacement property by the 180th day following the transfer of the relinquished property. These time limits are statutory. There are no extensions or exceptions, other than in the rare circumstance of a federally declared disaster. (Note that if the 180th day falls after the due date of your federal income tax return for the year the relinquished property was transferred (e.g. April 15th), then you must file a tax return extension form with the IRS to get the full 180-day replacement period.)
In a reverse exchange, the replacement property is acquired prior to the sale of the relinquished property. It must be structured correctly to qualify. You cannot own both the relinquished property and replacement property at the same time. This means that an “exchange accommodation titleholder” (EAT) either: (1) acquires title to the replacement property from the seller while you line up a sale of the relinquished property; or (2) acquires title to the relinquished property from you at the time that you acquire title to the replacement property. In either case, the maximum time period of a reverse exchange is 180 days, and you must have some means of financing the acquisition of the replacement property prior to availability of the relinquished property proceeds.
New improvements can be made to replacement property during the 180-day period in either a forward or reverse exchange, and these improvements will count towards the exchange value of the replacement property. This type of exchange must be structured correctly for the improvements to qualify as replacement property. This means the improvements must be made before you take title, by either the seller or in a forward or reverse “EAT” style arrangement.
The other requirements of the IRS regulations must also be met in addition to the time limitations.
How are the Exchange Funds Invested?
If you actually or constructively receive the exchange funds, the exchange will be taxable. Therefore, the exchange funds must be held by the qualified intermediary, or a third-party escrow holder or trustee. All exchange funds held by our firm are placed in qualified escrow accounts with an independent bank. Your exchange funds are not commingled with the funds of any other client for investment purposes. The exchange account requires your authorization for any withdrawals.
What are the Requirements of an Exchange?
There are several requirements for a valid exchange:
- Real Property Only.As of January 1, 2018, only real property can qualify for tax-deferred treatment.
- The Purpose Requirement.The taxpayer’s relinquished property and replacement property must be held for productive use in a trade or business or for investment. Property acquired primarily for sale will not qualify. Property held or acquired as a principal residence or primarily as a vacation or second home will also not qualify.
- The Like-Kind Requirement.Replacement property acquired in an exchange must be “like-kind” to the real property being relinquished. All real property is generally like-kind to other real property, so this requirement is typically easy to meet, but there are some exceptions.
- The Exchange Requirement.IRC §1031 specifically requires that an exchange take place. That means that property must be exchanged for other property, rather than sold for cash. The exchange distinguishes an IRC §1031 tax deferred transaction from a taxable sale and purchase. Today, a deferred exchange is accomplished through a Qualified Intermediary to insure that the exchange meets the requirements of IRC §1031.
How do the Identification Rules Operate?
Identification of all replacement property must be made in writing, signed by the taxpayer, and sent to a party to the exchange on or before midnight of the 45th day of the exchange period. The written identification is usually sent to the Qualified Intermediary. The identification of the replacement property must be unambiguous. For example, the identification can provide either a street address or legal description of the property. If improvements are to be constructed on the property, they must be described in as much detail as is reasonably practical.
The taxpayer may identify one or more properties in the written identification. The maximum number of replacement properties that may be identified is:
1). Up to three properties, without regard to their fair market value (The Three-Property Rule);
2). More than three properties, but the total fair market value of all these properties at the end of the 45-day identification period cannot not exceed 200% of the total fair market value of all properties relinquished in the exchange (The 200% Rule).
For example, if the relinquished property value is $500,000, the written identification can include up to three properties of any value. If the identification contains more than three properties, then the total estimated value of the identified properties cannot exceed $1,000,000.
Any property actually received during the 45-day identification period is treated as properly identified, but does count as a property for the purposes of the Three Property Rule or the 200% Rule if the taxpayer identifies additional replacement property in a written notice. If the taxpayer exceeds both the Three-Property Rule and the 200% Rule, then the properties acquired after the 45th day do not count as replacement property in the exchange (unless the taxpayer acquires 95% of all the identified properties).
How is Taxable Gain Computed in an Exchange?
As a rule of thumb, you must trade up or equal in value AND equity to totally defer all of the taxable gain in your exchange. For example, if your relinquished property is transferred for $500,000 and the mortgage is $300,000, to defer all the tax on the gain, you must acquire replacement property valued at least at $500,000 with at least equity of $300,000. You will be taxed to the extent you trade down in either value or equity (but not in excess of the tax you would have owed in a taxable sale). Thus, in the above example, if the replacement property was valued at $400,000, the taxable gain from the exchange would be $100,000 (assuming the tax basis in the relinquished property was below $400,000).
PLEASE NOTE THAT there are many exceptions to this rule and your taxable gain can be impacted by closing costs, including rent prorations and security deposits. Your taxable gain also can be impacted by several tax provisions, including depreciation and other recapture items, net operating losses, and special corporate and partnership tax provisions. We do not review your tax returns for items that may affect your taxable gain, and we do not undertake to calculate taxable gain in your exchange. YOU SHOULD CONSULT YOUR TAX ADVISOR PRIOR TO COMMENCING THE EXCHANGE REGARDING THE COMPUTATION OF POTENTIAL GAIN FROM THE EXCHANGE AND ANY SPECIAL TAX ITEMS THAT MAY IMPACT YOUR TAX CONSEQUENCES.
State of Washington Required Disclosure
Washington state law, RCW 19.31 0.040, requires an exchange facilitator to either maintain a fidelity bond in an amount of not less than $1 million that protects clients against losses caused by criminal acts of the exchange facilitator, or to hold all client funds in a qualified escrow account or qualified trust that requires your consent for withdraws. All exchanges must be deposited in a separately identified account using your taxpayer identification number. You must receive written notification of how your exchange funds have been deposited. Your exchange facilitator is required to provide you with written disclosures of how to independently verify the deposit of the exchange funds. Exchange facilitation services are not regulated by any agency of the state of Washington or of the United States government. It is your responsibility to determine that your exchange funds will be held in a safe manner.
OUR STAFF OF 1031 EXCHANGE EXPERTS
Vice-President for Operations and Administration Tax Deferred Exchange
Susy Heatherly is an extremely long-term career employee with our law firm with over thirty-two (32) years of continued employment. We are proud to have Susy as an employee.
Certified Exchange Specialist
Adam Grubbs is a very special person at our law office. He is not an attorney. He is not a paralegal. He is definitely not a legal assistant. Who, then, is Adam Grubbs and what does he do at McFerran Law?
Cecile Hedrick is one of our Senior Paralegals at McFerran Law. She works exclusively with our 1031 Tax Deferred Exchange Group, assisting clients throughout the entire United States.
Residential/Commercial Escrow Assistant
Shelly Hummel is a success story all her own. She is a woman who always amazes her fellow workers at our law office with her tenacity and determination. Actually, all of us at the law firm knew Shelly long before she became an employee.
Real Estate Attorney
Heather is a career associate real estate attorney with our law firm. She graduated from the University of Washington in Seattle with a Bachelor’s Degree in Political Science. Read More
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