1031 Exchange

Technical topics regarding tax preparation.
#1
Posts:
93
Joined:
17-Dec-2018 11:00am
Location:
AZ
Is a qualified intermediary a requirement for a valid 1031 exchange?
 

#2
Posts:
6043
Joined:
22-Apr-2014 3:06pm
Location:
WA State
I don't think so, but I wouldn't try one without it. The risk and consequence of the exchange failing is too high.
If the cost of an QI is not enough to justify the exchange, then maybe an exchange isn't the right fit.
~Captcook
 

#3
JR1  
Posts:
6043
Joined:
21-Apr-2014 9:31am
Location:
Western 'burbs of Chicago
Oh, I'll disagree with the good Cap'n, I do believe it's a requirement. And if you're not saving enough in deferred taxes to justify it, why bother?
Go Blackhawks! Go Pack Go!
Remembering our son, Ben Jan 22, 1992 to Aug 26, 2011.
For FB'ers: https://www.facebook.com/groups/BenRoberts/
 

#4
Posts:
93
Joined:
17-Dec-2018 11:00am
Location:
AZ
My client did a like kind exchange in 2022 but didn't use a qualified intermediary. So, I was wondering if it's mandatory. It sounds like it's highly recommended but not mandatory then?
 

#5
Posts:
835
Joined:
10-Jul-2022 9:41am
Location:
Northern California
It’s not mandatory, but rather, it’s one of the four “safe harbors” in the regulations (1.1031(k)-1(g)) which, if used, will result in a determination that the taxpayer is not in actual or constructive receipt of money or other property in the exchange.

Some taxpayers believe that without using a qualified intermediary, they can sell one property and then take the proceeds and reinvest them in another property, and that this will qualify for 1031 treatment. But a sale followed by a purchase where the taxpayer has the right to the sales proceeds is not an exchange, and unless the taxpayer uses one of the safe harbors, they will usually end up with a taxable transaction.
 

#6
Posts:
6043
Joined:
22-Apr-2014 3:06pm
Location:
WA State
JR1 wrote:Oh, I'll disagree with the good Cap'n, I do believe it's a requirement. And if you're not saving enough in deferred taxes to justify it, why bother?


I don't think we're in disagreement :D
~Captcook
 

#7
Posts:
2657
Joined:
28-Apr-2021 7:00am
Location:
FL
There is no requirement in 1031 or the regs that there be an intermediary. Whether it's a good idea or not depends on the circumstances. For example, an intermediary would not be appropriate for a contemporaneous exchange or a transfer of property in exchange for a promise to transfer property later.
Steve
 

#8
Posts:
93
Joined:
17-Dec-2018 11:00am
Location:
AZ
That's exactly what my client did and I don't believe any of the safe harbors applied. Waiting to hear back from them now. It's a shame but they received boot that they'll definitely have to pay tax on anyway.

Thanks for your responses.
 

#9
Posts:
835
Joined:
10-Jul-2022 9:41am
Location:
Northern California
gatortaxguy wrote:There is no requirement in 1031 or the regs that there be an intermediary. Whether it's a good idea or not depends on the circumstances. For example, an intermediary would not be appropriate for a contemporaneous exchange or a transfer of property in exchange for a promise to transfer property later.

I would appreciate knowing what Code section, regulation section, ruling or court case says that "a transfer of property in exchange for a promise to transfer property later" qualifies under section 1031.
 

#10
Posts:
2657
Joined:
28-Apr-2021 7:00am
Location:
FL
1031, so long as you meet the 45 and 180 day requirements.
Steve
 

#11
JR1  
Posts:
6043
Joined:
21-Apr-2014 9:31am
Location:
Western 'burbs of Chicago
And don't touch the money, or maybe even have the right to?
Go Blackhawks! Go Pack Go!
Remembering our son, Ben Jan 22, 1992 to Aug 26, 2011.
For FB'ers: https://www.facebook.com/groups/BenRoberts/
 

#12
Posts:
835
Joined:
10-Jul-2022 9:41am
Location:
Northern California
gatortaxguy wrote:1031, so long as you meet the 45 and 180 day requirements.

1031 doesn't say anything about "a transfer of property in exchange for a promise to transfer property later." So, you must have some other authority that says that such an exchange qualifies?
 

#13
Wiles  
Posts:
5058
Joined:
21-Apr-2014 9:42am
Location:
CA
JR1 wrote:And don't touch the money, or maybe even have the right to?

Correct. All you need to do is put contracts in place with an unrelated party to prohibit your access to those funds. You also want to make sure the contracts protect you and "your money". There are companies that specialize in this service for a nominal fee, e.g. $750 - $1,500
 

#14
TheGrog  
Posts:
377
Joined:
2-Feb-2022 8:43am
Location:
Virginia
Wiles wrote:Correct. All you need to do is put contracts in place with an unrelated party to prohibit your access to those funds. You also want to make sure the contracts protect you and "your money". There are companies that specialize in this service for a nominal fee, e.g. $750 - $1,500


The few 1031s I've seen don't charge too much more than this anyway, although I had to dig the 1031 intermediary fee out of a hole in closing statement numbers every time.
 

#15
Posts:
2657
Joined:
28-Apr-2021 7:00am
Location:
FL
A sale in exchange for a promise to deliver replacement property within the time constraints meets all the elements of 1031.
Steve
 

#16
Nilodop  
Posts:
18761
Joined:
21-Apr-2014 9:28am
Location:
Pennsylvania
Perhaaps you mean something like this example:
Date A, party 1 transfers property to party 2, receiving back the promise by party 2 to deliver replacement property.
Date A plus 44 days, party 1 identifies the property that party 2 will deliver.
Date A plus 179 days, party 2 delivers the promised property by deed transfer to Party 1.

Or more simply, party 1 transfers property to party 2 on date A and party 2 transfers replacemnt property to party 1.

In both examples, no cash ever changes hands. Miraculous!
 

#17
Posts:
2657
Joined:
28-Apr-2021 7:00am
Location:
FL
I'd go further and say the transaction qualifies for 1031 treatment even if the time periods are missed. That is, the time periods are merely for a safe harbor.
Steve
 

#18
Posts:
835
Joined:
10-Jul-2022 9:41am
Location:
Northern California
gatortaxguy wrote:I'd go further and say the transaction qualifies for 1031 treatment even if the time periods are missed. That is, the time periods are merely for a safe harbor.

Maybe you ought to read 1031, especially 1031(a)(3), which is the statute that requires the time periods to be satisfied.
 

#19
JR1  
Posts:
6043
Joined:
21-Apr-2014 9:31am
Location:
Western 'burbs of Chicago
Case law would disagree with you Steve. Those dates are not safe harbors at all. Folks who've missed either date have had nasty surprises, and lost their case.
Go Blackhawks! Go Pack Go!
Remembering our son, Ben Jan 22, 1992 to Aug 26, 2011.
For FB'ers: https://www.facebook.com/groups/BenRoberts/
 

#20
Nilodop  
Posts:
18761
Joined:
21-Apr-2014 9:28am
Location:
Pennsylvania
In both examples, no cash ever changes hands. Miraculous!
. My point was/is that I don't think this ever happens. Why would i transfer actual fee interest for a mere promise that the other party will do the same in several months?
 

Next

Return to Taxation



Who is online

Users browsing this forum: beardenjv, Google [Bot], Google Adsense [Bot], JoJoCPA, kyle242gt, NGeorgiaCPA, Nilodop, rbynaker, Seaside CPA, TexasTaxCPA, Trailman423 and 129 guests