Certified Title, LLC.

To many real estate investors, the “buzz words” often used to describe different aspects of a tax deferred exchange can be confusing. For example, doesn’t something with two ‘downlegs’ and three ‘uplegs’ sound a lot more like a lopsided creature than an exchange transaction? Reflected below are brief descriptions of commonly used exchange terminology:

ACTUAL RECEIPT: Physical possession of proceeds.

BOOT: “Non like-kind” property received; “Boot” is taxable to the extent there is a capital gain.

CASH BOOT: Any proceeds actually or constructively received by the Exchanger.

CONSTRUCTIVE RECEIPT: Although an investor does not have actual possession of the proceeds, they are legally entitled to the proceeds in some manner such as having the money held by an entity considered as their agent or by someone having a fiduciary relationship with them. This can create a taxable event.

DIRECT DEEDING: Transfer of title directly from the Exchanger to Buyer and from the Seller to Exchanger after all necessary exchange documents have been executed.

EXCHANGER: Entity or taxpayer performing an exchange.

EXCHANGE AGREEMENT: The written agreement defining the transfer of the relinquished property, the subsequent receipt of the replacement property, and the restrictions on the exchange proceeds during the exchange period.

EXCHANGE PERIOD: The period of time in which replacement property must be received by the Exchanger; Ends on the earlier of 180 calendar days after the relinquished property closing or the due date for the Exchanger’s tax return (If the 180th day falls after the due date of the Exchanger’s tax return, an extension may be filed to be entitled to the full 180 day exchange period).

IDENTIFICATION PERIOD: A maximum of 45 calendar days from the relinquished property closing to properly identify potential replacement property or properties.

LIKE-KIND PROPERTY: Any property used for productive use in trade or business or held for investment; both the relinquished and replacement properties must be considered like-kind” to qualify for tax deferral.

MORTGAGE BOOT: This occurs when the Exchanger does not acquire debt that is equal to or greater than the debt that was paid off on the relinquished property sale; Referred to as debt relief”. This can create a taxable event.

QUALIFIED INTERMEDIARY: The entity who facilitates the exchange; Defined as follows: (1) Not a related party (i.e. agent, attorney, broker, etc.) (2) Receives a fee (3) Receives the relinquished property from the Exchanger and sells to the buyer (4) Purchases the replacement property from the seller and transfers it to the Exchanger; Certified Title Company, (CTC) is a “Qualified Intermediary.”

RELINQUISHED PROPERTY: Property given up by the Exchanger; Referred to as the sale, ‘downleg’ or ‘Phase I’.

REPLACEMENT PROPERTY: Property received by the Exchanger: Referred to as the purchase, ‘upleg’ or ‘Phase U’.

Although many Exchangers include language in their Purchase and Sale Agreement establishing their intent to perform an exchange, it is not required by the Internal Revenue Code.

CONTRACTS MUST BE ASSIGNABLE
It is important, however, that the Purchase and Sale Agreements for both properties are assignable. In order to structure a typical exchange transaction, Certified Title Company must be assigned in as the Seller of the relinquished property and also as the Buyer of the replacement property. An Exchanger should review the contract to confirm they are not prohibited from assigning their position as either a Seller” or Buyer” to a Qualified Intermediary. When a typical exchange is initiated by Certified Title Company, CTC is shown as the Seller on the Settlement Statement instead of the Exchanger being reflected as the Seller.

“LAST MINUTE” EXCHANGES ARE POSSIBLE”
At Certified Title Company, many real estate investors contact our office just minutes before closing on their transaction and successfully convert a sale into an exchange. In most situations, a successful exchange can be accomplished as long as Certified Title is contacted prior to closing. Many Exchangers and real estate agents add exchange language to the contract for a couple of reasons:

1. It establishes their intent to perform a §1031 tax deferred exchange;

2. To notify the other party in advance of the need to assign the contract to an Intermediary.

The language below is satisfactory to establish the Exchanger’s intent to perform a tax deferred exchange and releases the other parties from costs or liabilities as a result of the exchange:

SALE OF RELINQUISHED PROPERTY
“Buyer is aware that Seller intends to perform an IRC Section 1031 tax deferred exchange. Seller requests Buyer’s cooperation in such an exchange and agrees to hold buyer harmless from any and all claims, costs, liabilities, or delays in time resulting from such an exchange. Buyer agrees to an assignment of this contract by the Seller.”

PURCHASE OF REPLACEMENT PROPERTY
“Seller is aware that Buyer intends to perform an IRC Section 1031 tax deferred exchange. Buyer requests Seller’s cooperation in such an exchange and agrees to hold seller harmless from any and all claims, costs, liabilities, or delays in time resulting from such an exchange Seller agrees to an assignment of this contract by the Buyer.”

Note: Certified Title Co, LLC cannot give tax and or legal advice. Every taxpayer should review their specific transaction
and potential tax consequences with their own tax and/or legal advisors.