Delayed Exchanges

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Delayed Exchanges – Capital 1031 Exchange Company

The most common exchange variation, the delayed exchange provides taxpayers with more flexibility and options in acquiring the replacement property than the simultaneous exchange. A delayed exchange results when there is a time delay between the sale of the relinquished property and the purchase of the replacement property.

The delayed exchange is also referred to as a “Starker Exchange” because of the landmark 1979 federal case, Starker v. U.S., 602 F.2d 1341 (9th Cir. 1979), wherein the court substantiated the validity of the delayed exchange process.

A delayed exchange provides taxpayers with up to 180 days to purchase replacement property once the relinquished property is sold. The use of a Qualified Intermediary such as Capital 1031 Exchange Company is required to facilitate a valid delayed exchange.

Capital 1031 Exchange Company specializes in four different types of exchanges.

There are three basic steps to the delayed exchange

A) Sale of relinquished property. Before closing on the sale of the relinquished property, the taxpayer retains a Qualified Intermediary such as Capital 1031 Exchange Company. Capital 1031 Exchange prepares all the necessary documents including closing instructions for the closing agent.

Capital 1031 Exchange will then instruct the closing agent on how to proceed with the closing and to deliver sale proceeds directly to Capital 1031 Exchange Company. Doing this prevents the taxpayer from having actual or constructive receipt of the funds. When the funds are delivered to Capital 1031 Exchange, access to the funds is restricted for the remainder of the exchange period.

B) Identification of the Replacement Property. The taxpayer must identify replacement property within 45 calendar days of the close of the relinquished property. Identification is proper only if the replacement property is designated as replacement property in a written document signed by the taxpayer and hand delivered, mailed, telecopied, or otherwise sent to the Qualified Intermediary.

There are three identification rules that apply:
1. 3 Property Rule: three properties no matter the value; or 2. 200% Rule: any number of properties as long as the aggregate fair market value of all proposed replacement properties does not exceed 200% (2x) of the fair market value of all of the relinquished properties; or 3. 95% Rule: any number of properties without regard to value – provided 95% of the value of the identified properties are acquired.

C) Purchase of Replacement Property.
Within 180 calendar days of the sale of the relinquished property, or the taxpayer’s tax filing date, whichever is earlier, the taxpayer must acquire “like kind” replacement property and the property acquired must be one or all of the previously “identified” replacement properties. The taxpayer then assigns the purchase and sale contract to Capital 1031 Exchange, who purchases the replacement property with the exchange proceeds and facilitates the transfer of the replacement property to the taxpayer by way of a direct deed from the seller. If the taxpayer’s tax filing deadline is prior to the closing, the taxpayer must file for an extension.

Terminology for 1031 Exchanges

Adjusted Basis

The adjusted basis is equal to the purchase price, plus capital improvements, less depreciation.

Boot

In an exchange, any funds not used to purchase the replacement property are considered boot, as well as the fair market value of any non-qualified (not “like-kind”) property received in the exchange, such as cash, notes, furniture, supplies, or reduction in debt obligations. The Exchangor pays taxes on the boot to the extent of recognized capital gain.

Capital 1031 Exchange Company

A Qualified Intermediary as defined in the Internal Revenue Service Treasury Regulations.

Direct Deeding

At the direction of the Qualified Intermediary (“QI”), title is conveyed directly to the ultimate owners without the QI actually having to be in the chain of title, thus avoiding the imposition of additional transfer tax.

Exchange Period

Time allowed for the Exchangor to acquire the replacement property in a delayed exchange, or the time allowed to dispose of the relinquished property, in a reverse exchange. In a delayed exchange, the time period begins on the day the relinquished property is transferred, or the exchangor relinquishes control of the property. It ends on the earliest of the 180th day after the transfer, or if no extension is applied for, then on the day the Exchangor’s tax return is due.

Exchangor

The property owner(s) seeking to defer capital gain tax by utilizing a 1031 Exchange.

Identification Period

Within 45 days after the close of the relinquished property, the replacement property must be identified in accordance with one of the three adopted rules.

Like-Kind Property

Refers to the nature or quality of the property the Exchangor gives up or receives in the exchange, such as real property for real property. Real property does not have to be similar in use, such as raw land for raw land. Raw land may be exchanged for any other real property that will be used in a trade or business or held for investment. Real Property located in the United States and Real Property located outside the United States are not like kind.