Frequently Asked Questions
[Q] Why do I need a Qualified Intermediary?
[A] A Qualified Intermediary is necessary to create the exchange of properties required under Section 1031. First American Exchange simplifies the exchange process by accepting a transfer of your property, conveying it to a buyer, taking custody of the proceeds, buying the replacement property, and transferring title to you. It is a sensitive role requiring experience, special knowledge, and extreme care to preserve the tax-deferred character of the transaction.
[Q] Can anyone serve as a Qualified Intermediary?
[A] No, there are certain persons who may not act as your Qualified Intermediary. Generally, these include certain relatives, or someone who, within a two-year period prior to your exchange, has acted as your attorney, accountant, real estate broker, or agent.
[Q] What characteristics should my advisors and I look for in selecting a Qualified Intermediary?
[A] Experience, financial stability, and customer satisfaction are factors that you should consider. First American Exchange possesses all of these characteristics.
[Q] If I select a Qualified Intermediary, do I still need a legal or tax advisor?
[A] Qualified Intermediaries are appointed to carry out the exchange and prepare the necessary documentation for tax deferral, but we are precluded from counseling you on the desirability or tax implications of an exchange.
[Q] How do I identify replacement property?
[A] The identification of replacement property must be submitted in writing, unambiguously described, signed by you, and delivered or sent before midnight of the 45th day. First American Exchange will provide you with forms to assist you with this requirement.
[Q] What happens if I change my mind about buying a replacement property and want to cancel my exchange?
[A] If you transfer the relinquished property and do not replace it with another, the sale will create a taxable event and any capital gain will be subject to federal and state capital gains taxes. Additionally, if you decide to cancel your exchange after First American Exchange receives the exchange proceeds, certain restrictions apply to all Qualified Intermediaries that limit access to those proceeds until certain time periods have elapsed. Our exchange professionals are available to discuss those restrictions.
[Q] What happens if I sell a property and then decide I want to make it a part of a tax-deferred Exchange?
[A] If you actually or constructively received proceeds from the sale, it might not be possible to include that property in a tax-deferred exchange. That's why it's important to note your intention to make this transaction part of a tax-deferred exchange in the contract to sell the relinquished property. If you have entered into a contract to sell, but have not closed, it may be possible to carry out a deferred exchange, provided you execute the proper exchange documents, identify the replacement property within 45 days of the closing, and actually receive it within 180 days or before your tax return is due. Your attorney or tax advisor can help you to make that determination.
[Q] What is boot?
[A] "Boot" can be cash received from the sale of the relinquished property or other non-cash consideration, including any property that is not "like-kind," promissory notes, or debt relief (mortgage boot). If you receive boot in an exchange, it is likely that all or some portion of the boot will be taxed.
[Q] Do I need to do a tax-deferred exchange for my personal residence?
[A] No, your principal residence is not considered property held "for productive use in a trade or business" or "for investment," and therefore, does not meet the requirements of Section 1031. However, Internal Revenue Code Section 121 allows an individual to exclude from taxation up to $250,000 of the capital gain realized on the sale of the individual's principal residence. A married couple filing jointly can exclude up to $500,000. Section 121 has certain requirements that must be met.
[Q] Can I just sell my relinquished property and put the money in a separate account and use that to purchase my replacement property?
[A] No. You cannot receive the proceeds or take constructive receipt of the funds without disqualifying the exchange.
[Q] Does vacant land qualify as like-kind property?[A] Yes; assuming it has been held for productive use in a trade or business, it is considered like-kind with all other types of real property.