With the Carrari/Ferrero/ Lewellyn & Lucas transaction, it was fortunate to have all three parties lined up simultaneously to effect a concurrently closing tax deferred exchange. Unfortunately, this isn’t usually possible. There is a method to get around this problem however.

A 1031 (which is the IRS code pertaining to this type of transaction) Tax Deferred Exchange gives the seller of a property 45 days from the sale of their property to identify potential replacement properties. They then have 180 days from that sale to close the purchase of the replacement property. When done properly, this transaction will carry the tax basis of the original property forward to the replacement property. While the exchange itself is tax-free, the capital gains tax that would have otherwise been due on the sale of the original property is merely “deferred” until the sale the new property.

To qualify, the property has to be “like kind” which is broadly interpreted to allow a 1031 exchange with most properties except a personal residence or “dealer” property (i.e. a homebuilder’s inventory). In order to avoid paying any tax, the replacement property must exceed not only the value of the original property, but both the equity component and the debt component of the original property must be met or exceeded.

Prior to the close of escrow on the sale of your original property, you must designate an exchange accommodator. This is a non-related party which actually holds the proceeds from the sale of your original property and then directs them to escrow on the purchase of your replacement property. There are several professional firms that do this, and Rincon would be happy to recommend some that we have had success with. The cost of an accommodator will generally run two thousand to three thousand dollars.

One of the most difficult aspects of a successful 1031 exchange is finding a replacement property that is more than just adequate. You want to find an excellent investment that meets your 1031 criteria, and it must be done within 45 days. And then, the last thing you want is a difficult closing which impairs your ability to close in a timely manner. An experienced and knowledgeable broker will help you to achieve these requirements.

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Information provided herein has been obtained from sources deemed reliable, but is not guaranteed