IRC SECTION 1031 INFORMATION
As a Qualified Intermediary, PTE Exchange LLC (PTE) will help guide the Exchanger through an IRC tax deferred exchange. PTE will prepare all of the necessary exchange documents and work closely with the company conducting the settlement on the sale of the relinquished property and the purchase of the replacement property.
Upon the sale of the relinquished property, the settlement company will transfer the net proceeds to PTE to be held until the purchase of the replacement property. Normal settlement charges may be deducted from the exchange proceeds including realtor commissions, transfer taxes and other fees negotiated in the sales contract.
Once the net sale proceeds have been wired into the PTE trust account, the funds can be placed into an interest earning account. Interest earned is considered income to the Exchanger and is not included in the exchange funds. PTE Exchange will disburse all interest earned directly to the Exchangee. The interest earned is separate from the Exchange funds.
Once the settlement is conducted on the relinquished property, the Exchanger has 45 days from the settlement date to identify the replacement property. Under Treasury Regulations issued by the Internal Revenue Service related to a Section 1031 tax-deferred exchange, there are stringent requirements regarding the identification of replacement property in a tax-deferred exchange. These requirements must be satisfied before the expiration of 45 days. No extension of time is permitted, even if the 45th day happens to fall on a Saturday, Sunday or legal holiday. THIS IS EXTREMELY IMPORTANT.
There are two ways in which one can identify the replacement properties. The 3-Property Rule allows one to identify three properties regardless of their value. The second way to identify replacement properties is by using the 200% Rule. This allows one to identify more than three properties provided the aggregate fair market value of these properties does not exceed 200% of the aggregate fair market value of all of the relinquished property. The fair market value of the replacement properties must be determined by the 45th day after the sale of the relinquished property and the fair market value of the relinquished property is determined on the date the property is transferred. The Exchanger is not required to actually acquire all of the replacement property identified if these rules are followed.
There are serious consequences if either the 3-property rule of the 200% rule is not adhered to. PTE recommends the Exchanger choose the 3-property rule and identify either two or three properties as the replacement property so that if the Exchanger is unable to close on the acquisition of the preferred replacement property, the Exchanger will have timely identified one or two alternative replacement properties which may be acquired instead.
Any type of replacement property may be identified (i.e., single famly rental property, duplex, apartment building, hotel, office building, warehouse, commercial building, vacant land, etc.) so long as the replacement property is to be held for productive use in trade or business or for investment. Property in any state of the United States or the District of Columbia may be identified.
After identifying the replacement property, the IRC requires the purchase to take place (1) prior to midnight of the 180th day after the date of the sale of the relinquished property or (2) prior to the due date (including extensions) of the Exchanger's federal income tax return for the taxable year in which the transfer of the relinquished property occurs. There are no exceptions to these rules.
The fee paid to the PTE Exchange, LLC, is for the sole purpose of drafting the Exchange Agreement, acting as the Qualified Intermediary and explaining the basic concepts of how a tax-deferred exchange occurs. The normal fee for a standard 2 party exchange is $750.00. PTE does not act as a tax advisor and strongly suggests that you consult your CPA or tax specialist concerning the specifics of your transaction.
Please contact PTE Exchange at 703-239-0650 if you would like tax exchange assistance.
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The Provident School of Real Estate was established to provide educational opportunities to Virginia Real Estate Agents. Post Licensing and Continuing Education Courses are designed with the Real Estate Agents' needs in mind. We offer classes satisfying the mandatory and elective requirements determined by the Commonwealth of Virginia. All Provident classes have been approved by DPOR for license renewal.
All settlements are conducted in a very professional and friendly environment. All settlement documents are thoroughly explained prior to signing. Copies of all signed settlement documents are provided immediately after the documents have been signed. We can also place your signed copies on a disc to reduce the amount of paper documents you need to store after the settlement.
All settlement companies are not alike. When deciding on a settlement company, choose one that has the experience and skill to provide the quality settlement you expect. A settlement company you can trust to take care of your money and the title to your most precious asset, your home. Let Provident Title & Escrow relieve your worries about the settlement process.