Delayed 1031 Exchange

Requirements and Procedures

You may sell a property held for productive use in a trade or business or for investment to a Buyer and exchange it for property held for productive use in a trade or business or for investment and pay no Federal or State income tax.

Requirements

For your property to qualify for a 1031 exchange, the following must be true:

Both the Relinquished Property and the Replacement Property must be held for either investment or productive use in a trade or business.

The property must be Like-Kind Property. Real property must be 1031 exchanged for real property.

There must be a reciprocal transfer of properties—a deed for a deed.

Conveyance of Relinquished Property From Exchangor to Buyer

The escrow company handling the Escrow for the Relinquished Property sends Downstream Exchange Company Escrow Instructions and the Preliminary Title Report.
Downstream prepares Closing Instructions, an Exchange Agreement, an Assignment Agreement, and a Buyer’s Acknowledgment based on that information. Downstream then sends these documents to you for your signature as the Exchangor and to Escrow to obtain the Buyer’s signature.

Timing and Identification Requirements

When the Relinquished Property escrow closes, you will receive:
- A letter from Downstream advising you of the date your escrow closed and the amount of funds Downstream received from escrow.
- A calculation of the actual calendar date of the 45th and 180th calendar day from the close of your escrow. You must identify the property you wish to acquire by the 45th calendar day from the close of your escrow and you must acquire the property you have identified by 180 calendar days of the close of your escrow.
- A property identification form included with the letter that you must return to Downstream by the 45th calendar day from the close of escrow of your Relinquished Property.
You may identify up to three Replacement Properties. Alternatively, you may identify any number of properties as long as their aggregate fair market value does not exceed 200 percent of the aggregate fair market value of the property you relinquished. As a final option, you may identify any number of properties as long as you acquire at least 95 percent of the aggregate fair market value of all the identified Replacement Properties before the 180-calendar-day period ends.
The identification of a property may be revoked in writing at any time during the 45-calendar-day period.
While Downstream is holding your funds, you will receive a monthly analysis advising you of the activity on your account. You will also receive an analysis of the activity in your account if we receive additional funds or make any payments authorized by you, the
We will send you a final analysis of the transactions after the close of escrow of your Replacement Property.

Conveyance of Replacement Property from Seller to Exchangor

The Replacement Property you acquire must be a property you intend to hold for investment for at least one year. Holding the property for investment means you cannot live in the Replacement Property.
At your request, we will send a deposit to the Replacement Property escrow when escrow opens.
The escrow company handling the Escrow for the Replacement Property sends Downstream Exchange Company Escrow Instructions and the Preliminary Title Report.
Based on that information, Downstream prepares Closing Instructions, an Assignment Agreement, and a Seller’s Acknowledgment. Downstream will send these documents to you for your signature and to Escrow to obtain the Seller’s signature.
Escrow on the Replacement Property must close no later than 180 calendar days after the close of escrow of the Relinquished Property. If a tax return is due during the 180 calendar days, your tax preparer must file for an extension to ensure you have the full 180 days to complete the exchange.

Practical Considerations

You have only 45 calendar days from the close of the sale of the Relinquished Property to identify and 180 calendar days from the close of the sale to acquire a Replacement Property. It may be challenging to find a suitable property within 45 days. You must complete a 1031 exchange with no extensions within these strict time limitations.
Practically, you can identify up to only three Replacement Properties. If you identify more than three Replacement Properties and the fair market value of more than three Replacement Properties exceeds 200 percent of the aggregate fair market value of the Relinquished Property, then you have to acquire at least 95 percent of the aggregate fair market value of all the identified Replacement Properties you have identified.

Important Issues to Take into Consideration

Generally speaking, to completely defer all capital gain taxes:
- You must use all of the net proceeds from your Relinquished Property to purchase your Replacement Property.
- You must also obtain a mortgage on your Replacement Property equal to, or greater than, the mortgage on your Relinquished Property.
- You can offset the mortgage obtained on the Replacement Property by putting the equivalent additional cash into the exchange.
Certain losses may affect the amount necessary to invest in the Replacement Property. You should consult with your tax preparer regarding your potential Recognized Gain.
In a 1031 exchange, if the property exchanged is to or from a Related Parties, it must be held for two years. Please email, call, or fax us for a further explanation if you feel this may apply to you.
It is also essential that you do not have actual or “Constructive Receipt” of the funds during the exchange process. No funds from the transaction should be received by the taxpayer until all Replacement Property has been acquired.
You cannot 1031 exchange stock in trade, inventory, property held for sale, stocks, bonds, notes, securities, evidence of indebtedness, certificates of trust, or beneficial interest in trust or interest in a partnership.
If you 1031 exchange California real property for out-of-state real property, California tax law provides for the nonrecognition of gain on the 1031 exchange. A 1031 exchange allows you to defer the gain and reduce the purchase price of the real property received. However, if you move out of California and then sell the replacement real property outside of California, the portion of the gain attributable to the increase in value of the California real property during the period you held it will be income from California sources. You must report income from California on California Form 540 NR.
California has enacted a new statute effective for real estate exchanged in an Internal Revenue Code Section 1031 tax-deferred exchange in tax years beginning on or after January 1, 2014. This new California statute requires that California taxpayers who sell and exchange California property for out-of-state property must file an information return (FTB 3840) with the Franchise Tax Board for the exchange year and every subsequent tax year. The purpose of this new statute is to allow the Franchise Tax Board to keep records of and then tax that taxpayer when they sell the out-of-state property.

The above information is provided for general information purposes only. You should discuss your actual individual property transaction with your current attorney, certified public accountant, or us.

We hope you find the above information helpful.

We know you will have questions about your transaction and encourage you to contact us. We will be pleased to assist you.

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