We've completed more than $25 billion of exchange transactions of all types while working on complex exchanges for sophisticated investors. Our clients include public REITs, private real estate companies, Fortune 500 corporations and individual investors. Our experience drives our solutions-oriented service, delivered with fine attention to detail, and allows us to provide strategies for common and uncommon exchange issues.
Exchange funds are held in an account at Rockland Trust and are FDIC-insured (up to applicable limits), remaining safe, secure and liquid. Larger balances are held in trust or escrow arrangements and invested in institutional class money market mutual funds selected by the customer, or in another money center bank, if required by our client. Funds cannot be transferred without dual signatures of the client and Compass. No other QI offers this degree of flexibility.
When Compass "parks" a client's property in a reverse like-kind exchange, Compass' documents implement state-of-the-art creditor protections so that clients are assured that they will have control of the property, income from the property, and the ability to acquire or transfer the parked property without any risks. Compass' personnel are highly-experienced, well-trained, and ethical, with many years of like-kind exchange experience without incident.
Compass carries Fidelity Bond and Errors and Omissions as a subsidiary of Rockland Trust Company.
All sales and exchanges are taxable, unless a specific provision of the Internal Revenue Code (Code) says that the gain or loss is not recognized. Section 1031 of the Code is one such provision. The rationale is that when a taxpayer exchanges an asset for another asset that is "like-kind" to the one disposed, there is a continuity of investment, and the taxpayer should be able to defer payment of the tax. The tax is deferred by a "carryover" tax basis into the new asset. The gain would be taxed later upon a sale or exchange in which no "non-recognition" rule applies. A simple principle, but there are many Regulations, court decisions, and IRS pronouncements one must know to gain a working knowledge of Section 1031 exchanges.
Qualified Intermediary - A Qualified Intermediary (QI) is a person, other than a disqualified person, who enters into an Exchange Agreement with the Taxpayer and receives and transfers (or is deemed to receive and transfer) the Relinquished and Replacement Property. The QI must receive the proceeds from the sale of the Relinquished Property, and the Taxpayer cannot have actual or constructive receipt of the proceeds during the Exchange Period, except to acquire identified like-kind Replacement Property and certain transactional expenses. Typically, a QI does not take actual title to either the Relinquished or Replacement Property. Under the Regulations, the QI is "deemed" to acquire ownership when the QI receives an assignment of rights from the Taxpayer and contract seller of the Relinquished Property (if different) and another from the contract seller of the Replacement Property. Notice of the assignment of rights is given to all parties to the contract, and then title to the property is directly deeded to the buyer (for the Relinquished Property) or the Taxpayer or its nominee (for the Replacement Property).
Identity of the Taxpayer - The Taxpayer selling the Relinquished Property must be the same Taxpayer for federal income tax purposes acquiring the Replacement Property. This issue occurs frequently in partnerships, tenant-in-common arrangements considered as partnerships, and in mid-exchange corporate reorganizations. Use of single-owner entities to acquire Replacement Property that are disregarded as separate entities from the owner, such as single member LLCs, will not change the identity of the Taxpayer.
Disqualified Person - A disqualified person is a person other than an agent of the Taxpayer. Certain persons, such as an employee, attorney, accountant, real estate agent or broker, investment banker, or investment broker are deemed the Taxpayer's agents for a period of two years. There is a safe harbor against agency for "routine financial, title insurance, escrow, or trust services for the Taxpayer by a financial institution, title insurance company, or escrow company." There is another safe harbor against agency for "services for the Taxpayer with respect to exchanges of property intended to qualify for nonrecognition of gain or loss under Section 1031."
A QI can also be disqualified by being "related" to the Taxpayer. There are many relationships that could cause a QI to become related to the Taxpayer, such as serving as a trustee or fiduciary for the Taxpayer.
A QI can also be disqualified as a result of being related to a person or entity that is an agent (or deemed agent) of the Taxpayer. Currently, there is an exception for this type of disqualification applicable to a bank QI or a bank-owned QI when the reason for disqualification for the QI would be that the QI is related to an affiliate that performed investment banking or brokerage for the Taxpayer.
The penalty for using a disqualified person as a QI or EAT is the loss of the safe harbors, and likely a failed exchange. If there is any doubt about other activities that a QI or an affiliate of the QI is an agent, the Taxpayer should use an independent QI or EAT.
Exchange Accommodation Titleholder - An Exchange Accommodation Titleholder (EAT) is a person, other than a disqualified person, who enters into a Qualified Exchange Accommodation Agreement (QEAA) with the Taxpayer and acquires "qualified indicia of ownership" of either the Relinquished Property (in an "Exchange First" reverse exchange) or the Replacement Property (in an "Exchange Last") reverse exchange. The Taxpayer must identify Relinquished Properties (in an "Exchange Last") transaction within a 45-day Identification Period, and the EAT must dispose of the Relinquished Property (in an "Exchange First" reverse exchange) or the Replacement Property (in an "Exchange Last" reverse exchange) within 180 days of the day that the EAT acquires qualified indicia of ownership of the parked property. Revenue Procedure 2000-37, 2000-2 C.B. 308 establishes a safe harbor for both Exchange First and Exchange Last reverse exchanges, and permits a number of non-arms' length agreements to exist between the EAT and the Taxpayer. The parked property is treated as if the EAT is the owner for federal income tax purposes.
Relinquished Property - Refers to the property that the Taxpayer is disposing of in the exchange.
Replacement Property - Refers to the property that the Taxpayer is acquiring to replace the Relinquished Property.
Qualified Use Property - Only Relinquished Property held for investment or held for productive use in a trade or business is eligible for a Section 1031 exchange. The Replacement Property must also be held for investment or productive use in a trade or business. Property specifically excluded from Section 1031 includes: (1) inventory; (2) stocks, bonds, notes, and securities; and (3) partnership interests. Personal use property, such as vacation homes, is generally not eligible for Section 1031.
Like-Kind Property - Real Estate : Generally, any fee simple interest in real estate is like-kind to another fee simple interest in real estate. A leasehold interest in real estate with a term of thirty or more years (including options) is like-kind to a fee simple interest. The term "like-kind" refers to the nature or character of the property, not its grade or quality. The property's use is not relevant, so for example, unimproved land can be exchanged for a multi-family building. Interests other than fee interests, such as leaseholds of less than 30 years, easements, and transferable development rights raise interesting like-kind issues often requiring analysis of state real property law.
Personal Property: The like-kind standard for personal property is narrower than for real estate. Personal property is like-kind when it is "like-class" within the meaning of Treas. Reg. §1.1031(a)-2, or like-kind within the general like-kind standard. "Like-class" is a safe harbor met when the Relinquished and Replacement Properties are within the same General Asset Class or, if not within any General Asset Class, like-class by being within the same Product Class under Division D of the most recent North American Industry Classification System (NAICS) Manual. If property is not "like-class," no inference is made that it is not like-kind under the general standard (i.e., character or nature).
Identification Period - The Identification Period (ID Period) begins on the day that the Relinquished Property is sold and ends on midnight of the 45 th day thereafter (irrespective of whether the 45 th day is a Saturday, Sunday, or legal holiday), counting the day after the sale as Day 1. During the ID Period, the Taxpayer must identify a limited number of Replacement Properties in writing to the QI. Properties may be identified as alternative or multiple properties. There are two general rules that are used: (a) the "three property rule"; and (b) the "200% rule." Particular care must be given to the adequacy of the description of the Replacement Property. Issues often arise in describing property under construction and in acquiring undivided interests as Replacement Property.
Exchange Period - A Taxpayer must commence and complete its exchange within the Exchange Period. The Exchange Period begins on the day the Relinquished Property is sold and ends on midnight of the 180 th day thereafter (irrespective of whether the 180th day is a Saturday, Sunday, or legal holiday), counting the day after the sale as Day 1. If the Taxpayer's tax return (for the taxable year the Relinquished Property is sold) becomes due before the 180th day, the Exchange Period will be LESS THAN 180 days, unless Taxpayer obtains an extension to file its tax return. A calendar year Taxpayer with an April 15 return due date, commencing an exchange after October 17 will have its Exchange Period shortened unless it files for an extension.
Constructive Receipt - If the Taxpayer actually or constructively receives the proceeds from the sale of the Relinquished Property during the Exchange Period, the transaction will be a taxable sale and not a tax-deferred exchange, even if the Taxpayer ultimately receives property from the QI. A Taxpayer can receive proceeds at the time of sale from a party to the transaction other than the QI, such as the buyer or the title company, and the proceeds will be taxable boot. However, actual or constructive receipt from the proceeds held by the QI causes the transaction to become taxable. Generally, there are only three circumstances in which the exchange proceeds can be released to the Taxpayer: (1) at the end of the 45-day ID period if there is no additional identified property the Taxpayer has not already acquired; (2) at the end of the Exchange Period; or (3) after the end of the ID period, but before the end of the Exchange Period, if the Taxpayer has acquired all of the Replacement Property it is entitled to receive under the Exchange Agreement. Otherwise, the exchange proceeds can be used by the QI at the Taxpayer's direction to acquire identified Replacement Property and pay certain transactional expenses.
Please call 508.830.1188 if you have replacement property needs.
In addition to general information about Section 1031 and its regulations, certain exchanges have specific issues and strategies you need to understand.
This section highlights such issues and strategies. Please check back regularly for updated and additional information in this section.
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