1031 Exchange - What are the Mechanics? - Posted by Frank Chin

Real Estate Investing Real Estate Law
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Posted by Frank Chin on January 10, 2001 at 07:59:14:

I didn’t expect such a quick answer.

I’ll give these folks a call today.

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1031 Exchange - What are the Mechanics? - Posted by Frank Chin

Posted by Frank Chin on January 10, 2001 at 07:13:33:

I am familiar with the concept, but am trying to do the first one. Here’s the situation.

  1. Finalizing a Sales agreement with a Purchaser on a property I own. Expect about 250k cash at closing. Closing expected mid March to mid April according to my attorney. This will be the down payment for the 1031.

  2. Looking through newspaper listings for commercial property from 500K to 1,000,000. I’m told credit for mortgage (250K to 750K) should be no problem at these levels.

  3. CPA advises Federal and New York State taxes will take 30% of the approximate 250K gain and 22% recapture on 100K depreciation. He feels 1031 is a good idea.

  4. Called an ad in the New York times, “Structure 1031 exchanges”. I was told that he’s a broker, and 250k is small potatoes. and he only deals with larger deals.

Now the mechanics:

  1. For non-simultaneous exchange, my attorney tells me theres no changes needed in the current Purchase/Sales agreement. Is this correct?

  2. He’s not sure what an escrow agent should be, but a friend advises its a Title company. I’m in the New York City area. Should I start calling title companies - or can someone recommend one.

  3. 45 days identification and 180 days to settlement rule. I’m advised that I write the title company identifying the property I’m selling. Is there a special IRS form involved? I’m told on closing, a check is made payable to the Title company for escrow purposes.

  4. Escrow agent holds funds for 180 days. I’m told that its held for 180 days if you change your mind or cannot find anything to exchange. Correct?

  5. Can you ask the escrow agent to put the funds into a high interest bearing instrument?

  6. Reverse 1031 exchange. Because I will be selling several proerties within the next two years, I was advised that if I missed doing a 1031 for this sale, I can pay the tax, then purchase the property, identify it, and sell the next property, and try to settle within 180 days. In other words, purchase first, then sell.

  7. Buying with partners. Informally spoke to others on purchasing something bigger with my funds. Any problems partnering with other if I’m doing a 1031 and their just putting in regular cash? My attorney feels this may not be do-able and too complicated.

Could some experienced hands out there comment on this. Thanks.

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Thanks to All - Really Got Going Today - Posted by Frank Chin

Posted by Frank Chin on January 10, 2001 at 17:43:33:

Thanks to the quick and concise information posted, I was able to speak with 3 Exchange Agents today:

  1. Fees for exchange agents ranged from $450 to $1,200.00 for a local New York firm.

  2. Because they simply send forms to my closing attorney to fill out, it does not seem to matter where they’re located. Hopefully, the one I choose should be knowlegeable.

  3. Learned that there is standard verbiage in Sales contract indicating 1031 transaction and assignment to escrow agent needed. I advised my attorney of this. He advised he will notify the purchasor 2 weeks before closing of this.

This seems to be it.

On the other hand, for the replacement property, if I can only get agents to return calls and get past the usual busy signals calling FSBO ads - I’ll be getting somewhere.

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Re: 1031 Exchange - What are the Mechanics? - Posted by SueC

Posted by SueC on January 10, 2001 at 13:17:06:

Frank, I’m surprised none of the lawyers you talked to knew or were themselves an exchange agent? Were they all RE lawyers? I know at least three attorneys who are also exchange agents, i.e. can hold deposits, do paperwork, handle escrow, tax forms, etc. I’ve never done an exchange (yet) and don’t know what fees for services might be involved, but whatever they are I can’t imagine not paying them so I could avoid all the detailed issues you raise in your email. (My job is buying real estate, their job is the paperwork!)

If you’d like to contact my personal RE attorney/agent even if just for a referral in your area (I’m in Philly PA) email me off the list, I’m sure he’d have no problem helping you out. And he wouldn’t waste your time, he’s very succinct. (BTW I’m in the Philly PA suburbs.)

Sue C

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Other 1031 Exchange web sites - Posted by Paul_MA

Posted by Paul_MA on January 10, 2001 at 12:58:56:

http://www.realtyexchangers.com/index.shtml
http://www.fnx1031.com/
http://www.xchangenet.com/

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Re: 1031 Exchange - What are the Mechanics? - Posted by dewCO

Posted by dewCO on January 10, 2001 at 11:29:13:

Find your intermediary, the company that will actually hold the money and they’ll give you all the mechanics and low down. I didn’t read your whole list, but you started out correctly, and from the sale you have 45 days to identify a property, so start now! Yes, I would check with title companies to see whom they recommend. In CO one of our big ones hs they’re own subsidiary that does this. A concern might be that they are well funded themselves and that they can’t/won’t use your proceeds while they are holding it for you on their own account. Your agreeement with them should state that. I’d also check with any realtors that could suggest a company to you.

Can’t remember if your sales agreement needs the language or whether it’s a separate addendum, but somewhere you need language that says the buyer is aware this is a 1031 exchange and they will cooperate, but you can always amend the contract if it needs to be in there. It’s not a majaopr issue because it doesn’t inconvenience the buyer or add to their cost in any way.

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Re: 1031 Exchange - What are the Mechanics? - Posted by David Krulac

Posted by David Krulac on January 10, 2001 at 07:47:36:

Frank,

Mechanics:

  1. IMHO the purchase/sales contract should state that this is part of a 1031 exchange. It has no effect on the buyer if you are the seller, but clearly identifies this as part of a conceived 1031 from the get go.
    2.The escrow agent should NOT be your attorney or anyone else who you have a relationship with. Can’t be your brother in law etc. An attorney, a title company or an exhange agent are possible choices but use somebody who knwo what they are doing, is 100% trustworthy, and has experience with 1031.
  2. You can identify multiple exchange candidates, I think its 3 but not sure. No IRS form, until tax time. But the letter to the exchange agent should identify the property you’re buying, if on the first leg you sold. You can not get any funds from the sale end of the exchange. And you cannot have “constructed receipt” of the funds. Iow, you can’t get or have ability to get the funds.
  3. Having the exchange agent keep the money for the full 180 days insures that if you find another deal ot the original deal is resurected that you can still exchange. If you call the whole thing off and have no intention of doing an exhange, then I can’t see why you can’t get the money. You’ll owe the taxes and probably will have to pay quarterly estimated tax.
  4. I don’t see why not.
  5. Yes, The IRS has booklet explaining 1031.
  6. Partners probably won’t work as the entity must be the same on both ends of the exchange. In other words one property sold can’t be in your name and a property that you’re buying in the name of a partnership or you and anyone else not on the deed of the property sold.
    It a like kind exchange even the buyer and seller must be “like kind”.
    HTH
    David Krulac
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Re: 1031 Exchange - What are the Mechanics? - Posted by JPiper

Posted by JPiper on January 10, 2001 at 07:42:45:

Frank:

I would contact Asset Preservation, Inc. at 800-282-1031. They are a subsidiary of Stewart Title. You may also go to their website at apiexchange.com to read various details regarding exchanges.

Most of your questions will be answered on the website or can be answered by calling them. Just thought I would mention that your attorney is wrong regarding the use of partners?.but it does need to be structured correctly. One way to do this is to buy the property with your ?partners? as a ?tenant-in-common?. Each partner then owns an undivided interest in the property. Not all that complicated but it does need to be put together correctly.

JPiper

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Not Exactly… - Posted by JPiper

Posted by JPiper on January 10, 2001 at 08:40:28:

As it pertains to your statement in #7 you?re right that Frank can?t exchange from a property owned by him to a property owned by XYZ Partnership. However, Frank CAN exchange to a property where Frank holds his interest as a ?tenant-in-common?. The other “partner(s)” would hold their interest(s) as ?tenant-in-common?. As you know, with ?tenants-in-common? each owner holds an undivided interest in the real property as if he were the sole owner. So Frank may exchange from his current property to a property held by multiple owners, each owner holding their undivided interest in the name that they desire, and comply completely with 1031 requirements.

JPiper

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Thanks for the Quick answer -Wow - Posted by Frank Chin

Posted by Frank Chin on January 10, 2001 at 08:03:52:

Thanks again Dave - you answered one of my earlier posts.

I didn’t think I get detailed answers in 30 minutes. People on this board are truly remarkable.

I should have consulted this board instead of spending the past week talking to attorneys.