1031 Exchange Forms

Typically, the 1031 Exchange involves forms like brokers’ price opinion, exemption and nonresident waivers, affirmation of residency, declaration of trust, IRS 8824 like kind exchanges, lien waivers, mortgage interest deductions, multifamily mortgage applications, notice of trustees sale, personal financial statements, power of attorney, promissory note, quit claims, schedule of income property, signature affidavit AKA statement or tax information release forms.

IRS Form 8824 has three purposes. It is not very complicated to fill if the three main purposes are understood correctly. The first one is to help the taxpayer report the dates of sale and replacement property closings, together with identification dates. This is to verify 45/180 date requirements. This information has to be in Part One.

Second is for the taxpayer to highlight their sale and purchase numbers (sale price, selling expenses, adjusted basis, depreciation taken, cost of replacement property) in order to make clear whether there was a full or partial exchange. This information should go in Part Three.

The third purpose is to show the new tax basis of the replacement property. The exchange being a deferral of taxes, the gain incurred by the taxpayer in the old property has to show up in the new property through an equal amount of lesser basis. This information must be there in Part Four.

The information in IRS Form 8824 makes the job of the IRS easy, to review a taxpayer’s prior 8824 Forms to ascertain the appropriate amount of taxable gain and see whether taxes are paid as and when the taxpayer decides to sell and not exchange.

But the exchanger or investor need not be baffled by the forms. The companies hired by the investor would provide the guidance and assist them in filling them out. The follow-up is also their responsibility.

Other forms include General Forms and the Official Identification Form to identify Replacement Properties to be returned not later than 45 days after the close of the Relinquished Property. W-9 Form is to request a Taxpayer ID for the investor. Form 593-C is meant for California Residents doing any sort of exchanges.

Forms related to funding issues include Request for Verification of Funds. This is to obtain a statement of the balance in the account, for the client himself or third parties, lenders, etc. The Miscellaneous Disbursement Request form is for releasing disbursements for appraisals, inspection fees, loan fees, etc.

Request for Return of Exchange Funds is for releasing the remaining exchange funds after the exchange is completed, and not for requesting closing money. Earnest Money Deposit Request is for the closing agent, and not for requesting closing money.

There are two major forms of tax-deferred exchanges–simultaneous exchange and delayed exchange. Numerous variations of these two fall into one category or the other.

The most basic type of exchange is the simultaneous exchange, known as In Lieu Exchange. To illustrate, in simultaneous exchange, the seller wants to sell the property A, agreeing to accept Property B in lieu of cash payment. If the Buyer already owns Property B, then the two parties simultaneously transfer their respective properties adhering to the value rules.

In the case of the buyer not owning property B, the buyer must purchase Property B and transfer it to the seller simultaneously with transfer of Property A to the buyer. To preserve the tax-deferred status of the transaction for the seller, he must not receive any cash or debt relief.

The other is delayed exchange known as a Starker exchange. This delayed exchange is done using a Qualified Intermediary (QI). In this type, the seller closes the sale of his property and escrows the proceeds of the sale with a QI. Here the seller is handicapped from taking possession of the proceeds in order to enjoy the tax-deferral status of the transaction.

After closing the sale of his property, the seller gets 45 days to identify the property or properties to be exchanged and should submit that in writing to the QI. The identified properties have to be purchased within 180 days of the sale of the relinquished property.

1031 Exchange Experts

As far as the 1031 Exchange is concerned, it is the Qualified Intermediary who can be called the top “expert” who makes or breaks the deal. The role of the QI is crucial to completing the exchange successfully. It is he who acts as the “glue” that binds the buyer and seller of the property together in the 1031 Exchange process.

Selecting the right QI is most important, otherwise it will be like going to a quack rather than a qualified doctor for treating some serious disease. That means, a taxpayer intending 1031 must be cautious about falling victim to a poor facilitator with disastrous results, as he may not do an exchange at all or does not know how to structure it. And his deal will not pass the muster at IRS audit, leading to a loss of exchange funds due to poor investing or conscious deceit.

Care must be taken to ensure the credentials of a QI as a really experienced, knowledgeable professional who is clear in thought and communication, and transparent in dealings. As the exchange process requires quick decision-making, only a learned facilitator can help and clearly understand the situation and use the options rightly.

What makes a good or bad exchange QI is his level of depth in knowledge and resources. He must be well-versed with all tax code changes and latest rulings. Since the 1031 code has many gray areas, only an experienced facilitator can apply them to situations intelligently. To ensure safety for the money of the taxpayer, the QI ought to maintain a substantial fidelity bond for the benefit of their exchangers.

There are no licensing requirements for Intermediaries. No federal regulations for 1031 Exchange Experts are in place, and only two states have mandated licensing and bonding requirements for them.

To practice, they only need not to be stay qualified as defined by the Internal Revenue Code. Under certain circumstances, the Code prohibits certain ‘agents’ of the taxpayer, such as accountants, attorneys and realtors who have served the taxpayer in their professional capacities within the last two years, from becoming a Qualified Intermediary for the taxpayer in an exchange.

Once in the job, a QI, who is not the taxpayer and not a disqualified person, takes up the assignment and enters into a written agreement called an Exchange Agreement with the taxpayer, acquires the relinquished property from the taxpayer, transfers the relinquished property, acquires the replacement property, and transfers the replacement property to the taxpayer. The whole process involves several time-consuming steps.

The written agreement between the taxpayer and intermediary arrogating the former’s rights to buy and sell, and hold the money or property to the latter, is to take advantage of the qualified intermediary “safe harbor” provision enshrined in 1031.

Thus the main obligations of the this middle-man cum expert can be summed up as receiving the 45-day identification notice for replacement property and delivering escrow funds for replacement property settlement and arranging for direct deeding of the properties and ultimately providing the final accounting.

10 Year Interest Only Mortgages

So, finally you have purchased that dream house of yours. Your dream of rubbing shoulders with what you consider your peer group is finally a reality. And how did you buy that house? Well, you have gone in like a brave soul and got yourself an interest-only mortgage loan. The lender has also given you a 10 year time period to repay the loan.

Interest-only mortgage loans are appealing for this very reason. They give you ample time to repay the interest on a monthly basis. Of course, one should not forget about the principal. A ten year repayment period is ideally suited for those people who are in the middle of their career, either in the late thirties or early forties. They are usually at the peak of their careers, with reasonably good energy levels and earning well. Such people are fairly confident of repaying the loan amount over the period of ten years, without any difficulty. It pays to be prudent though. One should always take into consideration the future while going in for interest-only mortgage loans. After all anything could happen in the ten years.

What interest-only mortgages have done though is to arm people with additional purchase power. They have their own inherent dangers though. You can never be sure of the future. Especially so, if you don’t have excess money to splurge in the first place! Interest rates may go up, real estate prices may come down, you may face a mid-career crisis, and anything is a possibility. Therefore you need to consider all these factors, before making that purchase decision. It is crucial that you consult your financial advisor, before buying that dream house of yours. You can also get vast information on the various complexities involved in interest-only mortgages, if you happen to surf through the web sites of leading online lenders and brokers.