Steps to Initiate an Exchange with IES

1. We strongly recommend that you first discuss a 1031 exchange with your tax and/or legal advisors in order to determine the tax liability resulting from the sale of your Relinquished Property and planned purchase of Replacement Property.  This will help to insure that a 1031 exchange will result in actual tax savings.
2. Make sure to include language establishing the intent to perform a 1031 exchange in the purchase and sale agreements for both the Relinquished Property and the Replacement Property.  The following are examples of language that may be utilized.SALE OF RELINQUISHED PROPERTY
   1031 Exchange.  If requested to do so by Seller, Buyer shall cooperate in a simultaneous or deferred exchange in accordance with Section 1031 of the Internal Revenue Code of 1986, as amended, by permitting Seller to assign this Agreement to a third party exchange intermediary .  The assignment may only take place simultaneously with the closing under this Agreement, and in no event shall Seller be relieved of any liability under this Agreement by reason of the assignment.  Buyer shall not be required to bear any escrow, title, or other expenses in excess of those Buyer would bear if there were no exchange.PURCHASE OF REPLACEMENT PROPERTY
   1031 Exchange.  If requested to do so by Buyer, Seller shall cooperate in a simultaneous or deferred exchange in accordance with Section 1031 of the Internal Revenue Code of 1986, as amended, by permitting Buyer to assign this Contract to a third party exchange intermediary .  The assignment may only take place simultaneously with the closing under this Contract, and in no event shall Buyer be relieved of any liability under this Contract by reason of the assignment.  Seller shall not be required to bear any escrow, title, or other expenses in excess of those Seller would bear if there were no exchange.
3. Contact us at (719) 632-1222 or toll-free at (866) 269-1031 with any questions regarding the exchange process. All initial phone consultations are free and at no charge.
4. Fax or e-mail a copy of the sales contract for the Relinquished Property and a copy of the title commitment or preliminary title report issued by the title or escrow company handling the closing. Our contact information is:
   

   Fax Numbers:	(719) 632-0974 (719) 632-0554
   E-mails:	Michael C. Cook, Esq. President	mike@mcooklaw.com

5. Upon receipt, our office will prepare the Exchange Agreement and exchange closing instructions and send these items to the title company, escrow agent, or attorney handling the closing of the Relinquished Property. These documents will be signed at closing.
6. IES will receive the Exchange Proceeds from the Relinquished Property closing. Upon receipt, IES will send a follow up letter confirming receipt of funds and advising you of your 45-day identification and 180-day closing deadlines. IES will also provide you identification forms to utilize when identifying yourReplacement Properties.
7. Once you have identified and contracted for the purchase of the Replacement Property, you should fax or e-mail a copy of the purchase contract for the Replacement Property and a copy of the title commitment or preliminary title report issued by the title or escrow company handling the closing.
8. Upon receipt, our office will prepare the exchange documentation required in connection with the purchase of the Replacement Property and arrange to wire the Exchange Proceeds directly to the title company, escrow agent, or attorney handling the closing of the Replacement Property.
9. Once all identified Replacement Properties have been acquired, you will receive a closing binder containing all your 1031 exchange documents. These documents will assist you or your tax advisor in completing the tax filings necessary to report the exchange.

Time Periods

There are two critical time periods with respect to an exchange under Internal Revenue Code Section 1031.  The first is that the Investor must identify the Replacement Property to be received in the exchange within 45 days following the sale of the Relinquished Property.  The second is that the Investor must acquire the Replacement Property within the earlier of (i) 180 days following the sale of the Relinquished Property or the due date (including extensions) of the Investor’s tax return for the year in which the sale took place.

Identification Period

The Investor must identify the Replacement Property to be acquired in the exchange by midnight on the 45th day following the transfer of the Relinquished Property.  The number of properties that an Investor can identify as part of the exchange must comply with one of the following three identification rules:

Number of Properties that Can be Identified

1. Three Property Rule. The Investor may identify any three properties, without regard to their fair market value and without regard to how many of the identified properties are ultimately acquired as part of the exchange.
2. 200% Rule. The Investor may identify any number of properties provided that the aggregate fair market value (i.e. listing price) of the identified properties does not exceed 200% of the fair market value (i.e. selling price) of the Relinquished Property.
3. 95% Rule. The Investor may identify any number of properties of any value provided that the Investor receive at least 95% of the aggregate fair market value of all identified properties by the end of the Exchange.  The fair market value of property is determined as of the earlier of the date the Replacement Property is received by the Investor or the last day of the 180 day exchange period and without regard to any liabilities secured by the property.

Contents of Identification

The Identification must contain an unambiguous description of the Replacement Property to be acquired and must be signed by the Investor.  A copy of the fully executed Purchase and Sale Agreement for the Replacement Property may satisfy this requirement.  In case of real property, the identification must include the legal description and/or a street address.  Additionally, if improvements to the Replacement Property are going to be made during the Exchange Period, the identification must include a description of the improvements with as much detail as is available at the time the identification is made.

How Made.

Identification of the Replacement Property to be received in the exchange must be made within the Identification Period by at least one of the following methods:

1. Completing the purchase of the Replacement Property prior to the expiration of the Identification Period; or
2. Complete a written identification that is signed by the Investor and received by the Intermediary or other qualified person prior to the expiration of the Identification Period.  Examples of parties other than the intermediary that are qualified to receive the exchange include the seller of the identified Replacement Property or the settlement agent or escrow officer that will handle the closing of the Replacement Property.

Click here to see Sample Identification Forms

Exchange Period

The Investor must receive the Replacement Property within the earlier of 180 days after the date on which the Investor transferred the Relinquished Property (i.e. the closing date for the sale of the Relinquished Property), or the due date (including extensions) for the Investor’s tax return for the tax year in which the transfer occurs.

Notice:
The actual deadline for completing an exchange is the earlier of either 180 days from the date on which the Exchanger transfers the relinquished property, or the due date, including extensions filed by the Exchanger, for the Exchanger’s tax return for the year of the transfer of the relinquished property. Consult your tax advisor regarding your tax filing requirement dates.

Exchange Requirements

The following requirements must be met to effectuate a tax-free exchange:

1. 1. Exchange must involve qualified property, either real or personal.  Qualified property is property that is either held for investment or for use in a trade or business.  Qualified property does not include real property used exclusively as a principal residence or vacation home.Additionally, 1031 exchange does not apply to the following types of property:
      • stock in trade or other property held primarily for sale;
      • stocks, bonds, or notes;
      • other securities or evidences of indebtedness or interest;
      • interests in a partnership;
      • certificates of trust or beneficial interests; or
      • choses in action.
   2. Property sold must be “like-kind” to property purchased.  The like-kind requirement for real property is very broad.  Generally, all real property is like-kind to all other real property.  For example, vacant land held for investment is like-kind to improved commercial or residential property.  Therefore, a residential investment property can be exchanged for a commercial investment property or for vacant land held for investment.  Other examples of real property that can be exchanged are perpetual water rights (if considered real property under state law),  easements, tenants-in-common interests, and leasehold interest with 30 years or more to run (including all unexercised option periods).
   3. To fully defer all capital gains taxes, an Investor must meet two basic requirements:
      1. Reinvest all Exchange Equity. All equity received from the sale of the Relinquished Property (sales price less debt payoff and exchange expenses) must be utilized as a down payment on the Replacement Property. Any cash received by the Investor and not reinvested into Replacement Property will be considered “cash boot” and subject to tax.
      2. Acquire Property of Equal or Greater Value. If an Investor does not acquire Replacement Property whose purchase price is not equal or greater than the net sales price of the Relinquished Property (i.e. sales price less Exchange Expenses), the trade down in value will be considered “boot” and may be subject to tax.

Click here to see an example of a tax-free exchange

1. Replacement Property must be acquired by the same taxpayer that sold the Relinquished Property. For example:
   

   If

   • Husband sells Relinquished Property, then Husband must acquire the Replacement Property.
   • If a Limited Liability Company, Partnership, Trust or Corporation sells, then same Limited Liability Company, Partnership, Trust or Corporation must acquire.

   Due to many lender requirements, it is important to anticipate vesting issues prior to initiating the exchange. Through use of disregarded entities like single member limited liability companies, there are alternative vesting options provided that these options are planned for and negotiated prior to the exchange.

2. Sale must be set up as an exchange PRIOR to closing on the Relinquished Property  See Steps to Initiate and Exchange.

Glossary of terms

Boot	Any property received in an exchange that is not considered “like-kind” to the property sold. This amount may be subject to tax.
Delayed Exchange	Exchange where Relinquished Property is sold to one party  followed by the purchase of Replacement Property from a different party within the 180-day exchange period.
EAT	Exchange Accommodating Title Holder.  This refers to the special purpose entity formed by the Intermediary to facilitate a reverse exchange.
Exchange Agreement	Written agreement between Investor and IES that meets the requirements of Internal Revenue Code Section 1031.  The Exchange Agreement must be signed prior to or at the closing on the Relinquished Property.
Exchange Expenses	New definition of Exchange Expenses: Transactional costs deductible in connection with the Exchange that should generally include costs that are:

What is a Tax-Free Exchange?

A “1031 exchange” or “tax-free exchange” is an exchange of real or personal property structured under Section 1031 of the Internal Revenue Code that allows owners of investment property or property held for productive use in a trade or business to defer the recognition of capital gains taxes associated with the sale of investment or business property by reinvesting the equity from the sale of business or investment property into other “like-kind” property of equal or greater value.