In this article, we are going to discuss the importance of balancing value, equity, and debt when it comes to 1031 exchange transactions.
Balancing Value, Equity and Debt
Typically, an Exchangor will acquire replacement property that is “up or equal” in Value (price) and will roll over all of the Equity (net proceeds) from the relinquished property into the replacement property.
Further, to the extent that the Exchangor was relieved of liabilities and debt, such as mortgages on the relinquished property, the debt relief must be offset by (1) new liabilities or mortgages taken on the conjunction with the purchase of the replacement property, OR (2) by investing additional cash in the replacement property equal to the amount of liabilities and debts that were discharged.
A QI’s Role
A Qualified Intermediary (QI) is a critical component in the success of a transaction:
- Provide a safe harbor structure to exchange transactions according to the Treasury Regulations.
- Hold proceeds from the sale of relinquished properties.
- Isolate the receipt of any taxable proceeds.
- Utilize the proceeds to purchase like-kind replacement properties.
- Prepare the required exchange documents and instructions.
Qualified Intermediary Professionals
If you are looking to defer your capital gains on the sale of real estate, your first step is to contact a qualified intermediary who can get you started with the process. At Commercial Partners Exchange Company, our qualified intermediaries can help you through every stage of the 1031 process by advising you, answering your questions, and preparing your 1031 documents. Contact us today to speak with a qualified intermediary about your real estate transaction and see if you are a good candidate.
- 1031 Hotline: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.
Defer the tax. Maximize your gain.
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