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Tax Mitigation Playbook: is this a property “exchange”?

Financial Planning Dentist

A sale followed by a purchase does not qualify as a 1031 Exchange. 

Rather a process of intention needs to be in place to qualify for an exchange to count for the tax benefits. The transaction must be treated as an exchange for tax purposes. 

To convert a sale followed by purchase into an exchange, a property owner will employ a qualified intermediary (QI) who acts as a middleman to tie the sale to a buyer and the purchase from a seller as a verified exchange. 

Internal Revenue Code Section 1031 states that “no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like-kind which is to be held for productive use in a trade or business or for investment.”

1031 Exchange. Instead, the transaction must be treated as an exchange for tax purposes. To convert a sale followed by a purchase into an exchange, a property owner will employ a qualified intermediary (QI) who acts as a middleman to tie the sale to a buyer and the purchase from a seller as a verified exchange. The taxpayer must contact the QI before closing the initial sale in the case of a forward exchange or purchase in the case of a reverse exchange. To open an exchange, the QI will need your Exchange Documents, which includes:

  • Contact Information for the taxpayer or main point of contact (phone, e-mail)
  • (“Exchangor” or “Exchanger”) Individual or entity desiring an exchange.
  • Taxpayer Name and Address 
  • Tax ID Number
  • Title Commitment
  • Signed Sale Contract (including all addendums)
  • Organizational Documents (if the property is not held in the name of the individual)
  • After gathering all necessary documentation and Information, the QI will send an 
  • The transfer of the relinquished property to the Qualified Intermediary and the receipt of the replacement property from the Qualified Intermediary is considered an exchange. To be compliant with IRC Section 1031, the transaction must be properly structured, rather than being a sale to one party followed by a purchase from another party.
  • Exchange Agreement to sign and open the exchange.

 

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