Frequently Asked Questions
Learn More About Corporate Exchange Services
Everything you need to know about CXS and the services we provide. Can’t find the answer you’re looking for? Contact us, and we’ll be happy to help you.
1031 Basics
It is a method whereby a Taxpayer can sell real property and acquire other “like-kind” real property without currently paying tax on the capital gain. The tax is deferred, not eliminated, by effectuating a 1031 Exchange. A 1031 Exchange is sometimes also referred to as a “Starker Exchange”, “Tax Free Exchange” or “Like-Kind Exchange”.
Corporate Exchange Services (CXS) is the Qualified Intermediary which drafts the documents necessary and is the vehicle to accomplish this “Like-Kind” refers to the nature or character of the property, NOT the grade or quality of the property. In a general sense, it refers to “substantially the same property.” (e.g. real property for real property, a car for a car, etc…)
It is a method whereby a Taxpayer can sell real property and acquire other “like-kind” real property without currently paying tax on the capital gain. The tax is deferred, not eliminated, by effectuating a 1031 Exchange. A 1031 Exchange is sometimes also referred to as a “Starker Exchange”, “Tax Free Exchange” or “Like-Kind Exchange”.
Corporate Exchange Services (CXS) is the Qualified Intermediary which drafts the documents necessary and is the vehicle to accomplish this “Like-Kind” refers to the nature or character of the property, NOT the grade or quality of the property. In a general sense, it refers to “substantially the same property.” (e.g. real property for real property, a car for a car, etc…)
Real property that is held for investment or for productive use in a trade or business. This includes exchanging improved real estate for unimproved, vacant real estate (gain will not be recognized except for that portion of the gain treated as Ordinary Income under the recapture rules of Sec. 1250) or business for investment property. This excludes the following types of property: homestead/principal residence; “Dealer Property”, which is property held primarily for sale; real property with a lease term of less than 30 years; partnership interests; stocks; bonds; notes or other beneficial interests. To be within the safe harbor, residential property should be rented 2 consecutive 12-month periods prior to conveyance of the Relinquished Property and 2 consecutive 12-month periods follow the acquisition of the Replacement property.
We recommend everyone contemplating an exchange to speak with his/her accountant or attorney with regard to his/her individual situation to determine whether the property is qualifying property.
Taxpayer
Party attempting to defer capital gains. Sometimes referred to the Exchangor.
Relinquished property
Property the Taxpayer seeks to dispose of in the exchange.
Replacement property
Property the Taxpayer seeks to acquire in the exchange.
Buyer
Purchaser of the Relinquished property.
Seller
Seller of the Replacement property.
Qualified Intermediary
Party who enters into the Exchange Agreement with the Taxpayer, acquires the
Relinquished property from the Taxpayer, transfers the Relinquished property to the Buyer, escrows and the invests the proceeds from the transfer of the Relinquished property, acquires the Replacement property from the Seller, and transfers the Replacement property to the Taxpayer.
Accommodation Titleholder (AT) or Exchange Accommodation Titleholder (EAT)
Entity that acquires the Replacement property in a reverse exchange on behalf of the Taxpayer.
Qualified Exchange Accommodation Agreement
Agreement between the Taxpayer and AT/EAT addressing the parties’ responsibilities in a reverse exchange
- Exchange: Must be a true exchange of Property, not a sale and reinvestment.
- Receipt or Constructive Receipt: Neither the Taxpayer, nor an agent of the Taxpayer, may receive or have actual or constructive receipt of or control over the proceeds of the sale of the Relinquished Property. These funds must be. paid directly to the Qualified Intermediary at closing.
- Timelines: The IRS has VERY strict time periods a Taxpayer must meet in order to qualify for the deferred tax treatment. There are two primary deadlines with which a Taxpayer must comply.
- IDENTIFICATION.
- A Taxpayer must identify the Replacement property or properties within 45 days after the transfer of the Relinquished property. This 45-day period includes holidays and weekends and there are no exceptions or extensions. The identification must be in writing and notice given accordingly, as set forth in the Exchange Agreement.
- 3-property rule: A Taxpayer may identify up to three properties without having a limit on the aggregate fair market value (“3 property rule”);
- 200% rule: A Taxpayer can identify any number of properties as Replacement properties as long as the aggregate fair market value of those properties is less than or equal to 200% of the fair market value of the Relinquished property (“200 percent rule”);
- 95% rule: Failure of a Taxpayer to restrict himself to the 3-property or the 200% rule may render the exchange invalid, since if a Taxpayer exceeds these limits, he must acquire virtually all (95%) of all properties identified. A Taxpayer may revoke some identifications and substitute others during the 45-day identification period, so long as he is able to satisfy the applicable limits at the end of the 45 day time period.
- A Taxpayer must identify the Replacement property or properties within 45 days after the transfer of the Relinquished property. This 45-day period includes holidays and weekends and there are no exceptions or extensions. The identification must be in writing and notice given accordingly, as set forth in the Exchange Agreement.
- ACQUISITION.
- A Taxpayer must actually acquire the Replacement property or properties within either 180 days of the transfer of the Relinquished property or the due date of the Taxpayer’s tax return, including extensions, whichever is earlier. If a person is exchanging multiple properties, the identification period and acquisition period are determined by reference to the earliest date on which any of the properties are transferred.
- IDENTIFICATION.
Types of 1031 Exchanges
This is used when a Taxpayer closes on the sale of the Relinquished property prior to the acquisition of the Replacement property and is the most common type of tax-deferred exchange. The net proceeds from the sale of the Relinquished property are used to acquire the Replacement property, along with cash from the Taxpayer or with a loan, if needed. The Taxpayer has 45 days from the closing on the Relinquished property to identify Replacement property and 180 days (or the due date of the Taxpayer’s tax return, including extensions, whichever is earlier) to close on the acquisition of the Replacement property.
This is used when a Taxpayer closes on the sale of the Relinquished property prior to the acquisition of the Replacement property and is the most common type of tax-deferred exchange. The net proceeds from the sale of the Relinquished property are used to acquire the Replacement property, along with cash from the Taxpayer or with a loan, if needed. The Taxpayer has 45 days from the closing on the Relinquished property to identify Replacement property and 180 days (or the due date of the Taxpayer’s tax return, including extensions, whichever is earlier) to close on the acquisition of the Replacement property.
This is used when a Taxpayer must close on the acquisition of the Replacement property prior to the closing on the sale of the Relinquished property.
A reverse exchange works similarly to a forward exchange (but in reverse). CXS sets up an LLC (EAT) to take title to the Replacement property. The Taxpayer (or a 3rd party lender) will loan the EAT the money to acquire the Replacement property and title will be held in the name of the new LLC.
The Taxpayer must identify which property or properties the Taxpayer wants to sell in order to complete the reverse exchange, within 45 days of the LLC acquiring the Replacement property. The Taxpayer must then close on the sale of the Relinquished property/properties within 180 days from the LLC’s acquisition of the Replacement property.
The EAT will then transfer the Replacement property back to the Taxpayer.
This type of exchange is used when the value of the Replacement property is less than the value of the Relinquished property and the Taxpayer wants to make capital improvements to the Replacement property to increase the value of the Replacement property to defer more capital gains taxes.
In an improvement exchange, CXS would form an LLC to act as Exchange Accommodation Titleholder (EAT). This EAT would take title to the Replacement property and use the exchange funds from the sale of the Relinquished property to acquire the property and make improvements to the Replacement property pursuant to sworn statements and/or invoices. The Taxpayer would identify the Replacement property plus the improvements contemplated to be done, within 45 days from the closing of the sale of the Relinquished property. The Taxpayer should work with his/her CPA to fill this out adequately. At the end of 180 days from the sale of the Relinquished property or when construction is completed, whichever is earlier, the EAT would transfer the Replacement property back to the Taxpayer.
The building does not necessarily need to be fully completed by the 180 days—but it has to be substantially the same property that you identified and the Taxpayer should use as much of the exchange proceeds as possible during the exchange period.
The Taxpayer cannot pre-pay for items in order to use all funds if the items for which it pre-paid are not constructed/used by the 180 days. And, any improvements made after the 180 days are not considered like-kind and therefore, not part of the exchange.
CXS has also handled a combination of the above-exchanges for taxpayers, including a reverse improvement exchange and a partial forward/partial reverse exchange.
Benefits and tax considerations
A primary advantage is that by deferring the tax on the gain, a taxpayer will have the use of that capital for investment. Additionally, a taxpayer can expand his portfolio of investment or business parcels by acquiring the new Replacement property or properties.
A disadvantage is that the basis of the Replacement property is essentially the same as the basis of the Relinquished property. This is referred to as a “transferred basis”. The basis in the Replacement property is lower than it would have been had the old property been sold and the new property been purchased in separate transactions. Such a reduced basis results in smaller depreciation deductions. Also, a taxpayer will pay those capital gains taxes at the time he/she actually sells the Replacement property. The 1031 exchange process merely defers the payment of this capital gain tax-it does not eliminate it.
A primary advantage is that by deferring the tax on the gain, a taxpayer will have the use of that capital for investment. Additionally, a taxpayer can expand his portfolio of investment or business parcels by acquiring the new Replacement property or properties.
A disadvantage is that the basis of the Replacement property is essentially the same as the basis of the Relinquished property. This is referred to as a “transferred basis”. The basis in the Replacement property is lower than it would have been had the old property been sold and the new property been purchased in separate transactions. Such a reduced basis results in smaller depreciation deductions. Also, a taxpayer will pay those capital gains taxes at the time he/she actually sells the Replacement property. The 1031 exchange process merely defers the payment of this capital gain tax-it does not eliminate it.
The basis of the Replacement property would be the fair market value of the new property, less the realized gain (which is the net selling price after selling expenses, less the adjusted basis), plus the recognized gain.
It is also calculated by taking the adjusted basis of the Relinquished property, plus the “boot” given, plus the mortgages on the Replacement property, plus the recognized gain, less the “boot” received, less the mortgages on the Relinquished property.
NOTE: Your tax advisor should be able to pinpoint the basis on your Replacement property, as the above are merely general formulas for determining your new basis.
Refinancing to pull equity out of a property prior to or after completing a tax-deferred exchange can result in a taxable event under the “step transaction” doctrine. The IRS may believe that there was no independent business purpose for the refinance loan, the purpose of the refinance was merely to cash out of the equity of either the Relinquished Property or Replacement Property without paying the capital gains tax. There is mixed case law history on this issue. Therefore, a Taxpayer should do several things to avoid the refinance being construed as a “step transaction” and to decrease the likelihood that the IRS will set the exchange aside:
- The loan should not appear to be solely for the purposes of pulling out equity;
- As a general rule, the refinance should be separated from the exchange sale or purchase by a least six months;
- If the refinance cannot be completed by six months prior to the sale, it should be completed prior to listing the Relinquished Property for sale;
- The refinance and sale or purchase should be documented as separate transactions to avoid any interdependence;
- The refinance should be commercially reasonable and reflect an independent business purpose separate from the exchange.
This would be considered “boot.” That cash would be considered taxable and would not receive the tax-deferred treatment. Capital gain is recognized on the lesser of the gain realized or the boot received. In addition to cash, “boot” also means: loan proceeds, notes, furniture, equipment and other personal property. In these cases, “boot” would be taxable and gain may be recognized to the fair market value of such “boot.”
Why should I use CXS?
First, the IRS mandates that a tax-deferred exchange be handled through a “Qualified Intermediary.” CXS is a Qualified Intermediary and will handle the transfer of funds so that a Taxpayer will not be considered to have had actual OR constructive receipt of any monies, which is a requirement by the IRS. CXS will hold the Taxpayer’s exchange funds in an interest-bearing account, which will then be used to purchase the Replacement property.
Second, CXS will also draft the Exchange Agreement and all of the accompanying documentation involved in the exchange transaction, including all assignments, reassignments, and a complete accounting after the exchange is completed. In addition, we will work with the respective title companies or attorneys to ensure the closings on the relative transactions are being handled and the transfer of monies is accomplished correctly.
CXS was established in 1995 and has assisted in effectuating well over 1000 forward, reverse and improvement/build-to-suit tax-deferred exchanges. By using CXS, you will substantially eliminate the risk of the IRS setting aside the exchange, which would make it a taxable transaction. CXS always recommends that a Taxpayer considering a 1031 exchange consult his or her accountant and/or attorney to determine all of the consequences of the exchange or whether the exchange would be beneficial for the Taxpayer, as CXS is merely a facilitator and does not give legal or tax advice.
First, the IRS mandates that a tax-deferred exchange be handled through a “Qualified Intermediary.” CXS is a Qualified Intermediary and will handle the transfer of funds so that a Taxpayer will not be considered to have had actual OR constructive receipt of any monies, which is a requirement by the IRS. CXS will hold the Taxpayer’s exchange funds in an interest-bearing account, which will then be used to purchase the Replacement property.
Second, CXS will also draft the Exchange Agreement and all of the accompanying documentation involved in the exchange transaction, including all assignments, reassignments, and a complete accounting after the exchange is completed. In addition, we will work with the respective title companies or attorneys to ensure the closings on the relative transactions are being handled and the transfer of monies is accomplished correctly.
CXS was established in 1995 and has assisted in effectuating well over 1000 forward, reverse and improvement/build-to-suit tax-deferred exchanges. By using CXS, you will substantially eliminate the risk of the IRS setting aside the exchange, which would make it a taxable transaction. CXS always recommends that a Taxpayer considering a 1031 exchange consult his or her accountant and/or attorney to determine all of the consequences of the exchange or whether the exchange would be beneficial for the Taxpayer, as CXS is merely a facilitator and does not give legal or tax advice.
“I always recommend Maura Snabes at Corporate Exchange Services to my commercial real estate clients looking to do a 1031 exchange. She has successfully guided many of my clients through the exchange process and is always very helpful, knowledgeable and responsive to questions that come up. It is important to use an exchangor that you can trust I have the utmost faith in Maura and her team!” — DAN STIEBEL, CCIM, Coldwell Banker Schmidt Realtors.
“I have worked with Corporate Exchange Services and Maura Snabes for almost 18 years. Maura has handled all types of real estate exchanges for me: forward, reverse and improvement. Maura is well-versed in all aspects of deferred exchanges and it is her professionalism, knowledge and personal service that makes me a repeat client. I trust Maura and Corporate Exchange Services and would recommend them to handle any type of real estate exchange. She has gone over and above in every transaction!” — KURT GRUEBNER, Gruebner Mechanical in Alden.
Contact us, and our team will reply as soon as possible.
corporate exchange services
Start Your 1031 Exchange Today
With over four decades of combined experience, Corporate Exchange Services (CXS) has successfully facilitated hundreds of exchanges.