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Tax-Deferred Exchange
The tax-deferred exchange, as defined in Section 1031 of the Internal Revenue Code of 1986, offers investors one of the last great opportunities to build wealth and save taxes. A tax-deferred exchange is a transaction in which an owner of real property, held for investment, sells one property and acquires another property without paying any taxes. When properly executed, the tax consequence does not disappear, but is moved forward into the new property. This tax-deferred transaction is the essence of the §1031 Exchange. By completing an exchange, the investor (exchangor) can dispose of their investment property, use all of the equity to acquire replacement investment property, defer the capital gain tax that would ordinarily be paid and leverage all of their equity into the replacement property. To defer the capital gain tax, the exchangor must acquire "like-kind" replacement property and the exchangor cannot receive cash or other benefits. In any exchange, the exchangor must enter into the exchange transaction prior to the close of the relinquished property. The exchangor and the qualified intermediary enter into an Exchange Agreement, which essentially requires that the qualified intermediary acquire the relinquished property from the exchangor and transfer it to the buyer by direct deposit from the exchangor. The qualified intermediary acquires the replacement property from the seller and transfers it to the exchangor by direct deed from the seller. The cash or other proceeds from the relinquished property are assigned to the qualified intermediary and are held by the qualified intermediary in a separate secured account. The exchange funds are used by the qualified intermediary to purchase the replacement property for the exchangor.
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