Overview and Analysis of the New 1031 Exchange Fact Sheet
| Read comments | Add comment / Rate this Article | Article by: William Exeter |
One area of frustration and confusion that has remained fairly consistent throughout my 24 years in the 1031 exchange industry is those fuzzy gray areas created by the IRS with each and every ruling they publish.
We always hope for black and white, but we usually receive shades of gray. I suppose this is good job security because we are always called upon to help understand what the IRS is really thinking, but we have always wished for something more concrete from the IRS.
Treasury Inspector General Issues Report on 1031 Exchanges
The Treasury Inspector General Issued a Report entitled “Like Kind Exchanges Require Oversight to Ensure Taxpayer Compliance.” This essentially amounts to an internal audit of the IRS by the Treasury Department on their policies and procedures in the tax administration of Like Kind Exchanges.
The Treasury Inspector General’s report criticized the IRS for failing to provide adequate oversight for 1031 exchange transactions, for failing to adequately define and provide technical guidance regarding 1031 exchanges of vacation properties and second homes, including when they would and would not qualify for tax-deferred exchange treatment, and for failing to resolve certain conflicts and/or disparities between certain IRS publications and income tax forms related to 1031 exchange transactions.
IRS Issues Fact Sheet No. FS-2008-18 on 1031 Exchanges
In response to the Treasury Inspector General’s report, the Internal Revenue Service issued Fact Sheet (FS-2008-18) on Like Kind Exchanges Under IRC Code Section 1031 on March 5, 2008, which was released on March 10, 2008 to the general public.
Fact Sheet FS-2008-18 was issued by the IRS to clarify certain policies and procedures regarding 1031 exchanges and to assist taxpayers in better understanding the 1031 exchange requirements in order to properly structure and use 1031 exchanges when selling property held for investment or used in their trade or business.
Fact Sheet Clarifies Certain 1031 Exchange Related Issues
I strongly encourage you to read the Fact Sheet if you are going to be structuring a 1031 exchange. It provides valuable information that will help keep you in compliance with the various tax codes, regulations and rulings.
I am going to comment briefly on the contents of the Fact Sheet as well as some of the significant items that it addresses and clarifies.
Great Summary of 1031 Exchange Requirements
The newly released Fact Sheet does a nice job of concisely summarizing the various 1031 exchange requirements that you should be aware of, including:
- the 1031 exchange is tax deferred and not tax free, and
- what type of taxpayers can take advantage of the 1031 exchange, and
- what kinds of properties qualify for tax-deferred exchange treatment, and
- what types of properties are like-kind to each other, and
- the various 1031 exchange structures such as forward (delayed), reverse and improvement 1031 exchanges, and
- the deadlines to complete your 1031 exchange, and
- computation of your deferred gain and deferred cost basis, and
- the completion of your IRS Form 8824.
It also does a nice job of clarifying certain issues that have created confusion in the administration of 1031 exchange transactions over the years.
Partial or Full 1031 Exchange
It addresses the fact that you can structure a complete or a partial 1031 exchange and that some gain will be deferred and some gain will be recognized in a partial 1031 exchange and that it will not disqualify your entire 1031 exchange.
Taking Control of Cash or Other Proceeds Before Exchange is Complete
The IRS Regulations are very specific about when your Qualified Intermediary can release your 1031 exchange funds to you. An early release can jeopardize your 1031 exchange, so be careful when you request the remaining funds from your 1031 exchange. Consult with your Qualified Intermediary about when you can have access to and when you can not have access to your 1031 exchange funds before you begin your 1031 exchange.
Identify Like-Kind Replacement Property to Qualified Intermediary
There continues to be significant amounts of abuse with regard to the identification of potential like-kind replacement properties, including the identification to parties that are agents of the taxpayer.
The IRS has clarified this issue in the Fact Sheet:
“The identification must be in writing, signed by you and delivered to a person involved in the exchange like the seller of the replacement property or the qualified intermediary. However, notice to your attorney, real estate agent, accountant or similar persons acting as your agent is not sufficient.”
Carefully Choose Your Qualified Intermediary
I am so glad that the IRS actually included this comment. Taxpayers don’t usually realize that Qualified Intermediaries are not licensed, not regulated and not required to be bonded.
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This information is not intended to replace qualified legal and/or tax advisors. Every taxpayer should review their specific transaction with their own legal and/or tax counsel.
