Page 12 - Old Republic Title Exchange

ANSWERS
TO YOUR QUESTIONS

What does the term 1031 refer to? 1031 is the number assigned to the Internal
Revenue Code Section that provides for the tax-deferred exchange of real property.
What are "safe harbors"? This term refers to the rules established by the 1991
Treasury Regulations for tax-deferred exchanges, which provide that, if followed, the
IRS will allow the exchange to qualify.
What is a Qualified Intermediary (QI)? An individual or business entity that provides
the following functions/services in a 1031 exchange: (1) acquires the relinquished
property from the exchanger and causes it to be transferred to the buyer; (2) holds the
exchange proceeds to avoid exchanger’s actual or constructive receipt of funds; and
(3) acquires the replacement property and causes it to be transferred to
the exchanger.
Why use a QI? Use of a QI is sanctioned as a safe harbor by the IRS.
What is Like-Kind? Like-Kind” does not mean that the property sold and the property
acquired must share the same physical characteristics. In other words, an apartment
building need not be exchanged for another apartment building. It can be exchanged
for: raw land, a farm, a duplex, rental property, industrial property, a perpetual
conservation easement, a leasehold of 30 years or more, etc.
Instead, “Like-Kind” simply refers to the requirement that property that is “held for
investment or for productive use in a trade or business” must be exchanged for other
property that also is “held for investment or for productive use in a trade or business.”
How do I properly identify my replacement property? Property that is intended
as replacement property must be unambiguously described in a written document
signed by the exchanger and sent to the QI or any other person “involved in the
exchange”, other than the exchanger or a disqualified person under Treasury
Regulation 1.1031(k)-1(k).

The exchanger must identify the replacement property on or before the 45th day*
after the transfer of the relinquished property. The taxpayer has the burden of
proof to show timely and proper identification. Backdating documents or otherwise
dishonestly alleging that a proper identification was made may result in federal/
civil and/or criminal penalties and fines. See IRC §§7201, 7207. See also Dobrich v.
Commissioner (9th Cir 1999) 188 F3d 512, wherein the 9th circuit affirmed the Tax
Court’s penalty of 75 percent of the underpayment of taxes against the taxpayer, who
backdated documents to make it appear that he had timely identified replacement
property. The taxpayer paid over $1,000,000 in back taxes, plus a $774,307 civil fraud
penalty for his efforts. The Treasury Regulations do no permit exchange proceeds
to be used to purchase property that has not been properly identified.
What are the exchange deadlines?* The 45-day period within which the exchanger
must identify – in writing – properties they intend to purchase as replacement
property in the exchange. The identification must be sent to the QI or any other
person involved in the exchange other than the exchanger or a disqualified person
under Treasury Regulation 1.1031(k)-1(k) on or before 45 days after the transfer of
the relinquished property. The property or properties listed on the identification
notice must be unambiguously described by a legal description, street address
or distinguishable name and the written identification notice must signed by the
exchanger.
Exchange period: The period within which the exchanger must complete the
acquisition of the identified replacement property(ies). This period ends the earlier
of 180th day after the transfer of the relinquished property or the due date of the
exchanger’s tax return for the year in which the relinquished property
was transferred.

*If the 45th or 180th day ends on a weekend or holiday, no extension of the time frame to the next business day is allowed under any circumstances

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