The 1031 exchange derived its name from Section 1031 of the U.S. IRC (Internal Revenue Code), which allows you to avoid giving capital gains taxes when you sell the investment property and reinvest the proceeds within specified time limits in properties of like kind and same or higher value.
Qualified Intermediary role:
Under section 1031, the proceeds received from the property sale remain taxable. For this reason, proceeds from the sale are transferred to a QI rather than the seller of the property, and the QI, also known as the accommodator, transfers them to the seller of the replacement properties. A qualified intermediary is a person that agrees to facilitate the 1031 exchange by keeping the funds involved in the exchange until they can be assigned to the seller of the replacement property. The qualified intermediary does not have any formal relationship with the parties exchanging properties.
Under section 1031 IRS rule, any proceeds received from the sale remain taxable. For this reason, proceeds from the sale must be transferred only to a qualified intermediary, and he transfers them to a seller of the replacement property.
Investor has to identify three properties as potential purchases as allowed by three-property rule, regardless of their market value.
● As long as their combined value doesn’t pass 200% of the value of the property sold the 200% rule enables an investor to identify unlimited replacement properties
● As long as investors obtain properties valued at 95% of their total or more the 95% rule permits him to distinguish as many properties as he wishes
Like-Kind Exchanges and its different kinds under DST 1031 Exchange
For making 1031 exchanges there are a number of possibilities. That diversity in their timing and other details, each generating a set of conditions and terms that have to be carried out:
●Delayed exchanges are commonly referred to 1031 exchanges carried out within 180 days, since, at a time, exchanges had to be completed simultaneously.
● In a 1031 exchange Build-to-suit exchanges allow the replacement property to be renovated or newly constructed. This means all construction and repairs must be accomplished by the time the transaction is completed. However, these types of transactions are still controlled by the 180-day time rule. Any changes made thereafter are recognized as personal property and won’t recognize as part of the exchange.
● A reverse exchange is what an investor acquires the replacement property before selling the property to be exchanged. In this case, the property must be transferred to an exchange accommodation titleholder and a qualified exchange accommodation agreement must be signed. A property for exchange must be identified, within 45 days of the transfer of the property, and the purchase must be performed within 180 days.