As an added service to our customers, Reliable 1031 Like Kind Exchange Services, LLC was formed as a separate company from Reliable Title Agency, Inc. to facilitate the tax deferred exchange of real estate pursuant to Section 1031 of the Internal Revenue Code.  We will make every effort to provide you with efficient and accurate information and exchange documentation to facilitate you tax-deferred exchange.  The following is a brief outline of some of the more important features of a 1031 exchange, and you should feel free to contact us at 330-965-0110 with any questions or comments you may have.  Also, you should fully discuss your exchange with your tax adviser.

WHAT IS A LIKE KIND (1031 EXCHANGE)
In a typical transaction, the property owner is taxed on any gain realized from the sale. However, through a Section 1031 Exchange, the tax on the gain is deferred until some future date.
Section 1031 of the Internal Revenue Code provides that no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business, or for investment. A tax-deferred exchange is a method by which a property owner trades one or more relinquished properties for one or more replacement properties of "like-kind", while deferring the payment of federal income taxes and some state taxes on the transaction.
The theory behind Section 1031 is that when a property owner has reinvested the sale proceeds into another property, the economic gain has not been realized in a way that generates funds to pay any tax. In other words, the taxpayer's investment is still the same, only the form has changed (e.g. vacant land exchanged for apartment building). Therefore, it would be unfair to force the taxpayer to pay tax on a "paper" gain.
The like-kind exchange under Section 1031 is tax-deferred, not tax-free. When the replacement property is ultimately sold (not as part of another exchange), the original deferred gain, plus any additional gain realized since the purchase of the replacement property, is subject to tax.

WHAT ARE THE REQUIREMENTS FOR A VALID LIKE KIND EXCHANGE
In order for a valid exchange to occur, the following four elements must be present:

1. Property, which can be either real or personal.
The following are not considered property, and do not qualify for like-kind treatment:

• Stock in trade or other property held primarily for sale.
• Stocks, bonds, or notes.
• Other securities or evidences of indebtedness.
• Interests in a partnership (which includes for these purposes membership interests in an LLC.
• Certificates of trust or beneficial interests.
• Choses in action.

2. Property must be held for a qualified purpose.

• Must be held for either productive use in a trade or business or for investment.
• Taxpayer’s purpose is determined at time of exchange.
• Taxpayer can exchange business property for investment property, and vice versa.
• There is no specific holding period for either the relinquished or the replacement property that will automatically qualify for an exchange.
• IRS’ position is that relinquished property acquired immediately before disposition, or replacement property disposed of immediately after exchange, do not qualify, since they were not held for qualified purpose.

3. Relinquished Property must be like-kind with Replacement Property.

• Greater concern in personal property exchanges.
• Must be like class, within IRS asset classes (as set forth in the North American Industrial Classification System).
• All real property is like-kind.
• Taxpayer can exchange:
• Vacant lot for office building.
• Multiple relinquished properties for one replacement property.
• One relinquished property for multiple replacement properties.
• Fee interest for leasehold, provided lease has at least 30 years to run (but leasehold exchanges present special issues; please contact us if you are contemplating such an exchange).

4. There must be an exchange.

• Must involve transfer of property for property as distinguished from a transfer of property for money (i.e. cannot be a sale followed at a later date by a purchase).
• Use of Qualified Intermediary (QI) helps in meeting this requirement, since by virtue of the exchange agreement Taxpayer transfers the relinquished property to the QI and receives the replacement property from the QI, and Taxpayer never has receipt of sale proceeds.

TIME LIMITATION
There are two distinct time limitations imposed on deferred exchanges:

• The taxpayer must identify replacement property within 45 days of the date of disposition the relinquished property.
• The taxpayer must acquire identified replacement property within 180 days of the date of disposition of the relinquished property (or by the last day for filing the tax return for the year of disposition of the relinquished property).

IDENTIFYING REPLACEMENT PROPERTY
The taxpayer must identify replacement property within 45 days of the date of disposition of the relinquished property. The 45-day identification period is not extended if the 45th day falls on a weekend or a holiday. If there are more than one relinquished property involved in a single exchange transaction, the 45-day limitation period begins to run from the date of disposition of the first property.

Identification is usually accomplished by the taxpayer forwarding a Notice of Identification to the intermediary. A facsimile is acceptable, and may even be preferred, since the fax date stamp provides good evidence of the timeliness of the identification.

The taxpayer can identify up to three replacement properties without regard to value. Alternatively, the taxpayer can identify any number of replacement properties beyond the original three, provided that the aggregate value of all identified properties does not exceed 200% of the value of the relinquished property.

THE QUALIFIED INTERMEDIARY
Reliable 1031 Like Kind Exchange Services, LLC will act as a Qualified Intermediary in structuring like-kind exchanges for our clients under §1031 of the I.R.S. code. We prepare all of the exchange documentation, and we coordinate the disbursement of the exchange proceeds in the course of the exchange. Although most of our exchanges involve real property, we are also capable of acting as intermediary in personal property exchanges, such as aircraft, boats and machinery.

As a Qualified Intermediary, however, we are precluded from giving tax advice, and so we encourage our clients to seek such advice from a competent tax counselor before making the decision to enter into an exchange transaction.
The Qualified Intermediary ("QI") is one of the safe harbors created as part of the regulations adopted following passage of the Tax Reform Act of 1986. The Act places limits on who can act as a QI:

• The QI cannot be the Taxpayer or a "disqualified person".
• A "disqualified person" is one who, within the two-year period ending with the disposition of the Relinquished Property, has acted as the Taxpayer's:
• Employee.
• Attorney.
• Accountant.
• Investment banker or broker.
• Real estate agent or broker.
• Use of a disqualified person as accommodator means that he is treated as Taxpayer's agent for purposes of receipt of exchange proceeds, thus jeopardizing the exchange.
• QIs can differ significantly as to the degree of service they will be providing, and you should take that factor into account when comparing fees. Some intermediaries simply send out blank forms, and the taxpayer is on his own to complete them properly. We provide completed exchange packages, with nothing remaining to be done except for execution of documents.

THE DEFERRED EXCHANGE
Involves four parties: the Taxpayer, the Buyer of Taxpayer's Relinquished Property, the QI, and the Seller of Replacement Property
Documentation:

• Exchange Agreement between Taxpayer and QI.
• Agreement for sale of Relinquished Property.
• Taxpayer contracts to sell Relinquished Property.
• Contract must be freely assignable by Taxpayer.
• Taxpayer's assignment to QI of contract rights in agreement for sale.
• Gives QI right to receive proceeds from the sale.
• Often provides for Buyer's execution, but only to evidence Buyer's receipt of notice required by regulations.
• QI's direction to Taxpayer to transfer the property directly to Buyer.
• This is one of the principal features of the 1986 act - it permits direct deeding, and thus avoids double conveyance or transfer taxes.
• Taxpayer contracts for Replacement Property, which contract must be freely assignable by Taxpayer - to avoid recognition of all gain (boot), taxpayer must acquire property of equal or greater value, and must also reinvest all of his equity in the Relinquished Property into the acquisition of the Replacement Property.
• Taxpayer assigns to QI his rights in purchase agreement.
• QI provides funding for purchase, and directs Seller to transfer property directly to Taxpayer, completing the exchange.

Again, we look forward to assisting you, and please do not hesitate to contact us with any questions or comments you may have.