Page 6 - Old Republic Title Exchange

OLD REPUBLIC EXCHANGE GIVES YOU
4 WAYS TO EXCHANGE

1. The Forward Exchange STEP TWO - IDENTIFICATION OF THE REPLACEMENT
The most commonly utilized tax-planning available to investors PROPERTY: The exchanger must identify a replacement
is the forward exchange. A forward exchange results when there property within 45 days after the close of the relinquished
is a delay between the sale of the relinquished property and the property. The identification is proper only if the replacement
purchase of the replacement property. [A forward exchange is property is designated as a replacement property in a written
also referred to as a “Starker exchange” because of the landmark document signed by the exchanger and hand-delivered, mailed,
1979 federal case entitled Starker v. U.S., 602 F2d 1341 (9th Cir. telecopied or otherwise sent to the person obligated to transfer
1979), wherein the court substantiated the validity of the forward the replacement property to the exchanger (i.e. the seller of
exchange process. Prior to the Starker case, §1031 of the Internal the replacement property) or to any other person involved in
Revenue Code authorized tax-free exchanges of property.] the exchange (such as the QI), other than the exchanger or a
Thereafter, Congress in the 1984 Tax Reform Act, adopted disqualified person. Three identification rules apply, which limit
subsection 1031 (a)(3), which created the 45-day identification the number of properties the exchanger may identify:
period and the 180-day exchange period. Finally, on April 25, • 3-Property Rule: Three properties, no matter what the fair
1991; the IRS promulgated the final regulations under section market value.
1.1031(a)-1, et. seq., which provide specific rules for deferred like- • 200-Percent Rule: Any number of properties, as long as the
kind exchanges.
aggregate fair market value does not exceed 200% (2x) of
The forward exchange provides investors up to 180 days to the fair market value of all the relinquished properties.
purchase a replacement property after the relinquished property • 95 Percent Rule: Any number of properties without regard
is sold. The use of a QI or other safe harbor is required to to value - provided 95% of the value of the identified
facilitate a valid forward exchange. The forward exchange occurs properties is acquired.
in three fundamental steps:
STEP THREE - PURCHASE OF REPLACEMENT PROPERTY:
STEP ONE - SALE OF THE RELINQUISHED PROPERTY: Within 180 days after the sale of the relinquished property or the
Before closing on the sale of the relinquished property, the exchanger’s tax filing date, whichever is earlier, the exchanger
exchanger retains a QI, such as Old Republic Exchange. Old must acquire a like-kind replacement property. The property
Republic Exchange prepares and exchange agreement, an acquired must be one or more of the previously identified
assignment of the sales contract and the closing instructions to replacement properties. The exchanger again assigns the
the escrow-closing agent. Old Republic Exchange instructs the purchase and sale contract to Old Republic Exchange, which
escrow/closing agent to deed the relinquished property direct to purchases the replacement property with the exchange proceeds
the buyer and to deliver sales proceeds directly to Old Republic and causes the seller to deed the replacement property direct to
Exchange - Thereby preventing the exchanger from having actual the exchanger.
or constructive receipt of the funds. Once the funds are delivered
to Old Republic Exchange, access to the funds is restricted for
the remainder of the exchange period. IRC §1031 provides strict
rules pertaining to the release of funds to the exchanger, even
when the exchanger decides not to proceed with the exchange.

FORWARD EXCHANGE TIMELINE

0 DAYS 45 DAYS 180 DAYS

CLOSE OF RELINQUISHED PROPERTY END OF IDENTIFICATION PERIOD CLOSE OF REPLACEMENT PROPERTY
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