1031 exchange

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05/08/22 11 1031 EXCHANGE RAMSEY A. BAHRAWY, ESQ.

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Page 1: 1031 exchange

04/10/2311

1031 EXCHANGE

RAMSEY A. BAHRAWY, ESQ.

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WHAT IS IT?

• A TAX DEFERRED EXCHANGE AUTHORIZED AND DEFINED BY SECTION 1031 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED.

• 1031 EXCHANGE DEFERS TAXES DOES NOT ELIMINATE TAXES

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LANGUAGE OF IRC SECTION 1031

• NO GAIN OR LOSS SHALL BE RECOGNIZED ON THE EXCHANGE

• OF PROPERTY HELD FOR PRODUCTIVE USE IN A TRADE OR BUSINESS OR FOR INVESTMENT

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LANGUAGE OF IRC SECTION 1031

• IF SUCH PROPERTY IS EXCHANGED SOLELY FOR PROPERTY OF LIKE KIND

• WHICH IS TO BE HELD EITHER FOR PRODUCTIVE USE IN A TRADE OR BUSINESS FOR INVESTMENT.

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EXCHANGE TERMS

• EXCHANGER

• INVESTMENT PROPERTY

• LIKE KIND PROPERTY

• RELINQUISHED PROPERTY

• REPLACEMENT PROPERTY

• IDENTIFICATION PERIOD

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EXCHANGE TERMS

• IDENTIFICATIONLIST

• EXCHANGE PERIOD

• CONSTRUCTIVE RECEIPT

• SAFE HARBOR

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WHAT IS SAFE HARBOR?

• PROCESS TO AVOID ACTUAL OR CONSTRUCTIVE RECEIPT OF MONEY

• MOST COMMON SAFE HARBOR IS THE QUALIFIED INTERMEDIARY

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KEYS TO A SUCCESSFUL EXCHANGE

• EXCHANGER SELLS RELINQUISHED PROPERTY WHICH WAS USED FOR BUSINESS OR INVESTMENT PURPOSE

• CONSIDER CONVERSION

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KEYS TO A SUCCESSFUL EXCHANGE

• EXCHANGER MUST ACQUIRE LIKE KIND REPLACEMENT PROPERTY.

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KEYS CONT’D

• EXCHANGER CAN NOT RECEIVE OR CONTROL THE PROCEEDS OR OTHER BENEFITS.

• ALL NET EQUITY TRANS-FERRED TO RELINQUISHED PROPERTY

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KEYS, CONT’D

• RELACEMENT PROPERTY MUST BE OF SAME OR GREATER VALUE AS RELINQUISHED PROPERTY.

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KEYS, CONT’D

• ADD EXCHANGE COOPERATION CLAUSE TO P&S;

• EXCHANGE AGREEMENT WITH QUALIFIED INTERMEDIARY PRIOR TO CLOSING ON RELINQUISHED PROPERTY.

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WHAT IS LIKE KIND PROPERTY

• LIVESTOCK

• MOTOR VEHICLES

• AIRCRAFT

• BOATS

• REALTY

• FURNITURE

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EXAMPLES: EXCHANGE OF LIKE KIND REALTY

• VACANT LAND FOR IMPROVED LAND

• 1 FAMILY FOR OFFICE BUILDING

• 2 FAMILY FOR RETAIL PROPERTY

• CONDO FOR INDUSTRIAL PROPERTY

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WHAT PROPERTY IS EXCLUDED FROM A LIKE KIND EXCHANGE

• STOCK IN TRADE

• INVENTORY

• SHARES OF STOCK

• NOTES

• BONDS & SECURITIES

• INTERESTS IN PARTNERSHIP

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CONTROL VIOLATES IRC SECTION 1031

• TO AVOID ISSUES OF CONTROL CERTAIN PERSONS ARE EXCLUDED FROM ACTING FOR AN EXCHANGER

– “RELATED PARTIES”

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CONTROL VIOLATES IRC SECTION 1031 CONT’D

–EMPLOYEE; ATTORNEY; REAL ESTATE BROKER OR AGENT; ACCOUNTANT; INVESTMENT BANK OR BROKER - 2 YEARS PRIOR TO TRANSFER.

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CONTROL VIOLATES IRC SECTION 1031 CONT’D

–EXCEPTIONS: ROUTINE FINANCIAL; TRUST TITLE, INSURANCE OR ESCROW SERVICES; EXCHANGE SERVICES.

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CLOSING COSTS ALLOWED IN AN EXCHANGE

• BROKERS COMMISSION

• DIRECT ATTORNEY FEE

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CLOSING COSTS AND EXCHANGE

• TITLE INSURANCE PREMIUMS

• RECORDING FEES

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CLOSING COSTS AND EXCHANGE

• ESCROW OR CLOSING AGENT FEES

• QUALIFIED INTER-MEDIARY FEES

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USUAL TYPES OF EXCHANGES

• DELAYED

• SIMULTANEOUS

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TIME LIMITS FOR DELAYED EXCHANGE UNDER IRC SECTION 1031

• TIME LIMITS ARE SPECIFC AND INFLEXIBLE;

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TIME LIMITS FOR DELAYED EXCHANGE UNDER IRC SECTION 1031

• FROM CLOSING OF RELINQUISHED PROPERTY EXCHANGER HAS 45 DAYS TO IDENTIFY REPLACEMENT PROPERTY;

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TIMELINE FOR DELAYED EXCHANGE CONT’D

• IDENTIFICATION OF REPLACEMENT PROPERTY MUST BE IN WRITNG, AKA PROPERTY ID LIST.

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TIMELINE FOR DELAYED EXCHANGE CONT’D

• AFTER 45 DAYS THE EXCHANGER MAY NOT CHANGE THE PROPERTY IDENTIFICATION LIST;

• IF EXCHANGER CHANGES LIST TAX DUE!

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IRC 1031 TIMELINE FOR DELAYED EXCHANGE CONT’D

• THE PURCHASE OF REPLACEMENT PROPERTY MUST BE COMPLETED WITHIN 180 DAYS AFTER THE CLOSE OF THE RELINQUISHED PROPERTY.

• MARRIED COUPLE – over $1,500,000

• MARRIED WITHOUT CHILDREN

• MARRIED TO NON US CITIZEN

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EXAMPLE OF TIMELINE FOR DELAYED EXCHANGE

• CLOSING ON RELINQUISHED PROPERTY - MAY 9, 2006

• EXCHANGER HAS 45 DAYS OR UNTIL JUNE 22, 2006 TO IDENTIFY A REPLACMENT PROPERTY IN WRITING.

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EXAMPLE OF TIMELINE FOR DELAYED EXCHANGE

• CLOSING ON REPLACEMENT PROPERTY MUST OCCUR NO LATER THAN- NOVEMBER 8, 2006 (180 DAYS FROM MAY 9, 2006 ).

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EXCHANGE & TITLE

• RELINQUISHED & RELACEMENT PROPERTY MUST HAVE SAME TITLE

• A CHANGE IN TITLE DEFEATS TAX DEFERAL

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EXAMPLES OF TITLE

• ABC TRUST RELINQUISHES ABC TRUST MUST ACQUIRE

• JOHN JONES, AN INDIVIDUAL RELINQUISHES JOHN JONES, AN INDIVIDUAL, MUST ACQUIRE.

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EXCHANGE & TITLE

• A LENDER MAY REQUIRE A TITLE CHANGE BY ADDING A SPOUSE OR MOVINGTITLE TO AN INDIVIDUAL NAME FROM AN ENTITY NAME.

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ADDITIONAL TECHNICALITIES

• LLP, LLC

– CAN NOT TAKE ADVANTAGE OF EXCHANGE UNLESS LLC OR LLP OWNS 100% OF THE INVESTMENT

• MIXED USE

– EXCHANGE ONLY VALID FOR BUSINESS USE PORTION

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ADDITIONAL TECHNICALITIES

• VACATION & SECOND HOMES

– IF PROPERTY DOES NOT PRODUCE CURRENT INCOME DOES NOT QUALIFY

• IDENTIFICATION

– EXCHANGER PERMITTED TO IDENTIFY 3 PROPERTIES OF UNLIMITED VALUE

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ADDITIONAL TECHNICALITIES

• IDENTIFICATION OF MORE THAN 3 PROPERTIES

– TOTAL FAIR MARKET VALUE OF PROPERTY BEING IDENTIFIED CANNOT EXCEED 200% OF FAIR MARKET VALUE OF THE RELINQUISHED PROPERTY

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EXCHANGE SCENARIOS

EXAMPLES

• RELINQUISHED

• VALUE - $200,000

• MTG - $100,000

• EQUITY - $100,000

• REPLACEMENT

• $350,000.00

• $250,000.00

• $100,000.00

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EXCHANGE SCENARIOS

EXAMPLES

• RELINQUISHED

• VALUE - $200,000

• MTG - $100,000

• EQUITY - $100,000

• REPLACEMENT

• $350,000.00

• $260,000.00

• $ 90,000.00

• $10,000.00 TAXABLE

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EXCHANGE SCENARIOS

EXAMPLES

• RELINQUISHED

• VALUE - $200,000

• MTG - $100,000

• EQUITY - $100,000

• REPLACEMENT

• $200,000.00

• $ 80,000.00

• $120,000.00

• $20,000.00 TAXABLE

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CONCLUSION

TAX SAVINGS DETERMINED BY KNOWING/FOLLOWING THE RULES.• PROFESSIONAL TEAM CONCEPT -

IMPORTANT TO CONSULT WITH YOU LEGAL AND FINANCIAL PROFESSIONALS;

• ENLIST AN EXPERIENCED INTERMEDIARY TO SUCCESSFULLY COMPLETE THE TRANSACTION.

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REVIEW

• ARRANGE FOR SALE OF PROPERTY AND INCLUDE EXCHANGE LANGUAGE IN P&S

• SIGN AGREEMENT WITH QUALIFIED INTERMEDIARY

• SIGN OVER DEED TO Q.I.

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REVIEW

• AT CLOSING NET SALE PROCEEDS PAID TO QI

• WITHIN 45 DAYS IDENTIFY PROPERTY OF LIKE KIND TO BE ACQUIRED

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REVIEW

• WITHIN 180 DAYS OF SALE PURCHASE ONE OF THE PROPERTIES ON THE IDENTIFICATION LIST AND COMPLETE THE EXCHANGE.

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