A number of years ago, Schell & Hogan began offering a service that has been helping real estate investors save money. We began acting as a “qualified intermediary” (QI) to help facilitate tax deferred exchanges. If you are selling real estate held for business, rental or investment purposes and you have a gain on the property and are willing to buy another piece of property, don’t sell it — exchange it! Defer the income taxes on the gain and put that money to work for you. Depending on your tax bracket, 34 percent or more of the gain could go to the government if an exchange is not used to defer the tax. With changes being considered in the marginal income tax rates, deferring the gain could become even more important in the future to keep more of your money working for you instead of paying the tax.
In a 1031 deferred exchange, some paperwork is prepared prior to the sale of the property. Then when the property is sold, the sales proceeds go directly to the QI. The QI holds the sale proceeds in a secure escrow account until the replacement property is obtained. The QI also provides the paperwork which makes it qualify as a tax deferred exchange. A QI should be someone with knowledge of like kind exchanges and the tax code, so they can make sure the documentation is appropriate to withstand IRS scrutiny. Since our firm began providing this service, we have participated in nearly 800 exchanges, locally, and around the United States. By choosing Schell & Hogan, you have someone experienced and local holding the money rather than dealing with someone from out of town.
When the sale occurs, the funds go into the intermediary’s escrow account. From the date of sale, the investor has 45 days to identify potential replacement properties (the investor can always identify up to three potential replacement properties, and in certain cases, may be able to identify more than three properties). They have 180 days from the sale of the property to close on the purchase of a replacement property. The replacement property has to be “like kind,” but the definition of “like kind” includes most real estate other than principal residences or second homes. So you could sell a residential rental property and replace it with a commercial rental property or with a vacant lot to hold as an investment. You can also sell property in Georgia and replace it with a property in a different state. If you want to replace one property with multiple replacement properties, this can be done as well.
When the replacement property is purchased, the QI provides the funds directly to the closing attorney for the purchase. When all steps are followed with proper documentation, you can defer all of the tax on the gain. If you don’t reinvest all of the money, you may still qualify to do a partially tax deferred exchange.
The transaction must be reported on your tax return on Form 8824, but if it’s completed and documented properly and you reinvest all of the proceeds it should end up being fully tax deferred. For the transaction to be fully tax deferred, you have to purchase property or properties of equal or greater value than the property you disposed of and you have to use up all of the cash that was received on the sale of the property.
If you are interested in a 1031 deferred exchange or have questions about them, call or email Steve Graham at Schell & Hogan for a free consultation. The phone number is 912-638-9031 and email address is email@example.com.
Steve has been with Schell & Hogan since graduating from University of Michigan in 1983 and has been functioning as a qualified intermediary for over 25 years. Schell & Hogan has been in business in Glynn County for over 50 years.
A free consultation may end up saving you a lot of money!