Definitions and Rules of a Deferred 1031 Exchange

1031 Exchange
An event where a taxpayer exchanges or trades real property held for investment or used in a trade or business for other real property and defers the capital gains tax on the transaction.

Tax Deferred
The capital gains tax which would have been paid on the sale of the real property is not paid but is deferred to be paid at a later time when the property traded for is sold in a non-exchange sale.

Property Held for use in a Trade or Business
Any real property used by a taxpayer in its business. This could be an office building, warehouse, ranch, shop, garage, farm, etc.

Investment Property
This is real estate purchased to produce an investment income or an investment gain on resale. It can include, but is not limited to apartments, a rent house or raw land.

Like-Kind Property
In the exchange world, “like-kind” does NOT mean you must exchange an apartment project (investment property) for another apartment project, or raw land for raw land, it means that you must exchange real estate for real estate. This permits, within the categories of “held for investment” or “used in your trade or business”, the exchange of apartments for land, or office buildings for apartments, etc., as long as the old properties sold and the new properties acquired are either held for investment or used in a trade of business. The property sold and the property acquired do not have to be exactly alike, they just have to be real estate and fall in the category of “held for investment” or “used in your trade or business”.

Relinquished Property
Relinquished Property is the real estate held for investment or use in your trade or business which is sold or “relinquished”. Think of the Relinquished Property as the property being sold and the Replacement Property as the real property being acquired.

Replacement Property
Replacement Property is the real estate acquired by the taxpayer/seller in a 1031 exchange as replacement for the relinquished property.

Exchange Proceeds
The cash received by the Qualified Intermediary through the sale by the taxpayer of the Relinquished Property and any debt paid on the property sold. In order to defer all of the tax on a sale you must spend all of the cash proceeds received or more if you want to and you must borrow the same amount of money or more if you need or want to that was used to pay off any loan or loans on the property sold. You will pay the tax on any cash proceeds not used to buy Replacement Property or any loan paid off in your sale that was not replaced with same or greater payoff amount of loan on the Replacement property.

The 45-Day Rule
You must identify by written notice (signed by you) to your Qualified Intermediary the Replacement Property or Properties (you can identify more than one possible Replacement Property) you want to buy within 45 days after you close the Relinquished Property. Do not count the date of closing; count 45 days after the closing date and that is the end of the “Designation or Identification Period” – the true end, whether it’s a Saturday, Sunday or any legal holiday. Better get this part completed on that date as a minimum. Before that date is better. After that date, your exchange may be disqualified.

The 180 Day Rule
You must close, fund, and acquire (do it all) the Replacement Properties within 180 days after you close the Relinquished Property. Do not count the date of closing; count 180 days after the closing and that’s the “drop-dead” date to completely acquire the Replacement Property – the true end, whether it’s a Saturday, Sunday or any legal holiday. Better complete this part on this day as a minimum. Before that date is better. After that date, your exchange may be disqualified.

Three Property Rule
Try to designate three Replacement Properties or less to purchase, generally, because if you stay with three or less, you don’t have to worry with anything other than being sure it is like-kind property. If you designate four or more, then you must deal with the “200% Rule”.

The 200% Rule
This rule only comes into play if you designate more than three properties as possible Replacement Properties. If you do, add up the “fair market values” of all the properties designated and be sure that this aggregate number is not more than the gross sales price of the Relinquished Properties times 2. If it is more and you don’t fall within the “95% Rule”, your exchange is outside the safe harbor and may fail.

 The 95% Rule
This is an exception to the consequences of violating the 200% Rule, which applies if you violate the “Three Property Rule”. If your sum of the fair market values of more than three Replacement Properties is greater than two times your sales price of the Relinquished Property, you are still “safe” if you acquire 95% in value of these designated properties, which means that you really need to buy all of the Replacement Properties you designated.

Exception to the 180 Day Rule
You don’t get 180 days to complete the exchange if you have to file your Federal income tax return for the year in which your relinquished property sold before the 180th day. If your tax return for the year in which your relinquished property sold is due on April 15th and your 180th day falls in May, you have to complete your acquisition of the replacement property before April 15th even if there are more days left in the 180 day time frame. BUT, if you file an extension to your tax return, then this exception doesn’t apply. Remember to file the extension if you are in this situation.

Direct Deeding
1031 Exchange allow Direct Deeding, making it all much simpler. In previous years, the exchange taxpayer deeded the property to be sold to the Qualified Intermediary who would then deed to the buyer of the Relinquished Property, and the seller of the Replacement Property would deed to the Qualified Intermediary who would deed to the exchange taxpayer. You don’t have to do this anymore. You can deed the Relinquished Property directly to your buyer, and receive the Replacement Property deed direct from the seller.

For more information on 1031 Exchange, please reach out to our Texas Escrow Company team:

Bill Kramer
Executive Chairman
214.855.8850
bkramer@republictitle.com

Carla Janousek
Sr. Vice President, CES®
214.855.8879
cjanousek@republictitle.com

Helen Wooten
Exchange Assistant
214.855.8879
hwooten@republictitle.com

Disclaimer: This information is a summary of some of the common terms involved with 1031 deferred tax exchanges. Do not rely on this summary alone to make an exchange decision, or think that there isn’t much more involved than what is described in these simple definitions. Exchange decisions should be based on conversations with a tax advisor, an accountant, a Qualified Intermediary, and a tax attorney.

Spotlight On: Texas Escrow Company

If you have real property for sale, which is used in your trade or business, or is held for investment, you may be eligible to defer the capital gains tax when the property is sold by utilizing a deferred 1031 Exchange. In order to receive this tax treatment, you should contact a Qualified Intermediary, like Texas Escrow Company, a subsidiary of Republic Title of Texas, Inc., and complete the documentation necessary to create your exchange before you close the sale of your property.

The property sold needs to be real estate that you have held for investment or used in your trade or business, such as an office building or rent house. Vacation homes for your personal use, or your personal residence, do not qualify for this tax treatment. You should consult your accountant or attorney for advice on the utilization of a 1031 Exchange, especially if your accountant files your income tax return. It is important that the person filing your income tax return agrees that the exchange achieves the tax deferral you want. Your accountant can also estimate the tax payable on your sale so you can evaluate whether you want to do a 1031 Exchange. The 1031 Exchange only defers the capital gains tax (long or short term) on the sale of real property by purchasing replacement real property of an equal or greater value than the property sold.

Using exchange funds to purchase like-kind replacement real property for an investment, or use in your trade or business, and then later selling that replacement property in another 1031 Exchange to purchase other replacement property, will continue to defer the capital gains tax, plus any additional gain that might accrue by virtue of an increased value of the replacement property. In many cases, once you start exchanging real property, you need to continue using 1031 Exchanges to purchase real property if you wish to continue deferring the capital gains tax. When you sell the replacement property without using a 1031 Exchange, capital gains taxes will be due.

We suggest that you review the supplemental Definitions and Rules of a Deferred 1031 Exchange which is written in easy to understand language to familiarize yourself with some of the terms and rules, that are involved in a 1031 Exchange. All the definitions and rules of a deferred 1031 Exchange should be discussed with your tax advisor, accountant, attorney and a Qualified Intermediary before you do any exchange transaction. The rules encompass all kinds of situations and we repeat that it is imperative to consult with your tax advisors and a Qualified Intermediary about the transaction you have in mind before you sell and, in some cases, before you even contract to sell.

For more information on 1031 Exchange, please reach out to our Texas Escrow Company team:

Bill Kramer
Executive Chairman
214.855.8850
bkramer@republictitle.com

Carla Janousek
Sr. Vice President, CES®
214.855.8879
cjanousek@republictitle.com

Helen Wooten
Exchange Assistant
214.855.8879
hwooten@republictitle.com

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Coronavirus (COVID-19) Outbreak Laboratory Research & Quality Control on a high technology equipment.

A Message to our Customers Regarding COVID-19

At Republic Title, the health and well-being of our customers, employees and communities is our top priority. As the effects of COVID-19 continue to evolve, we want to reach out with information about our efforts to ensure the safety of all involved while continuing to provide uninterrupted service to our valued clients.

Our offices are open for business. Should the need arise to temporarily close any of our offices, we have contingency plans in place to conduct business at alternate offices with limited interruptions so that we are still able to handle your transactions. In the event of a possible closure, advance notice will be communicated to our customers as well as posted on our website. Any updates will be posted regularly. If you have further questions, we encourage you to reach out to your closing team.

Cleanliness of our offices is always a top priority but in light of recent COVID-19 news, Republic Title is taking additional precautions to protect our customers and employees. This includes providing hand sanitizer at our offices and extra sanitizing after each closing. 

Out of an abundance of caution, Republic Title will be postponing all classes that we have scheduled through Friday, April 10. The health of our employees and customers is of the utmost importance and we feel this is best to minimize risk.

We are monitoring this situation closely. We realize that our clients are experiencing the same challenges we are in terms of business continuity and are trying to determine the best way to protect all parties involved and help prevent further spread of the virus. We are here for you and will communicate with you should there be any changes to our normal business process.

2019 Dallas Business Journal Best Places to Work

We are thrilled to announce that we have been named the #𝟭 𝗕𝗘𝗦𝗧 𝗣𝗟𝗔𝗖𝗘 𝗧𝗢 𝗪𝗢𝗥𝗞 for large size companies in 2019 by the Dallas Business Journal! This wouldn’t be possible without our incredible employees who are the best in the business; so a huge 𝗧𝗛𝗔𝗡𝗞 𝗬𝗢𝗨 to all of you!

https://www.bizjournals.com/dallas/news/2019/10/24/best-places-to-work-large-2019.html

Republic Title Lakewood Hosts 11th Annual Pink Party Benefiting The Bridge Breast Network

On October 3rdRepublic Title Lakewood hosted their 11th annual Pink Party for a Cause with all proceeds benefiting The Bridge Breast Network, an East Dallas organization providing healthcare to breast cancer patients.

“Republic Title is a big supporter of the Bridge Breast Network and the work they do in our community,” said Republic Title’s Cindy Maya, “We are thrilled that our Pink Party for a Cause benefits such a worthy cause and couldn’t have done it without our generous customers and donors. This is our 11th year of hosting the event and it has been so exciting to watch it grow with this year’s event raising over $12,000!”.

All proceeds raised at Republic Title’s Pink Party for a Cause benefit The Bridge Breast Network, whose mission is to save lives by providing access to diagnostic and treatment services for breast cancer to low income, uninsured and underinsured individuals.

“It truly takes a village for a program like Bridge Breast Network to achieve our mission. The $12,000 raised at the Republic Title Pink Party will provide lifesaving mammograms for 80 women. Early detection is the key to survival. Together our two organizations are building bridges of hope by providing mammograms for uninsured women.” said Terry Wilson-Gray, Executive Director of the Bridge Breast Network.

For more information on The Bridge Breast Network, visit www.bridgebreast.org.

Click here to view pictures from Republic Title’s Pink Party.