I have several questions regarding property
exchanges and taxes.
1. Do I have to use up all my
capital gains in a 1031 exchange or can I take out some cash and pay tax on that
much while I leave the rest for 1031 exchange?
2. Which firms hold the cash
within the 180 days to reinvest? Any ideas where to get a list of some of these
3. Do I pay anything to have this money held back for me for that period
Thanks for your help. Cheers! -- Sola
1031 exchange allows you to defer gain on the sale of an investment property
into another property of a like kind. The deferral allows you to avoid paying
tax while presumably trading for something more desirable. It's one of the few
great tax shelters available.
Since it's difficult to
find someone willing to trade properties, most exchanges are accomplished through
an intermediary. The intermediary receives the sales proceeds of the property
you dispose of and uses those funds to acquire the replacement property you identify.
While you may be able to keep some money out from the
exchange by paying tax on it, the timing of when you get that money is controlled
by limitations on the intermediary. Generally, when you enter into the Section
1031 exchange you have to commit all the net proceeds from the sale to the exchange,
which means the money from the closing goes to the intermediary. Regs. Sec 1.1031(k)-1(g)(4)(i)
provides that it is not possible to receive money upfront from the escrow intermediary
while still qualifying for exchange treatment. That means the intermediary is
required to impose limitations on your access to the funds.
you can get your money after 45 days if you don't identify a replacement property.
If you identify a replacement property but can't or don't close, you usually have
to wait the 180 days to get your money out of the intermediary. If you identify
a property for less than all the money than is in escrow (i.e. so you can keep
some money out) you'll have to wait the 180 days or until you close to get the
A qualified intermediary can't be someone
related to you and it can't be your attorney, accountant or broker. Your real
estate attorney will usually have a few companies to choose from to accomplish
the exchange. Of course, all good things cost money and you can expect to pay
between $500 and $1,000 for the service.