Question

Felicity owns land valued at $2 million. She has located a buyer for her property. Felicity wants to buy an office building for $2.2 million. The owner of the office building has accepted her purchase offer. Felicity proposed to close the sale of her property and the purchase of the office on the same day. She will contribute cash to make up the difference between the sales and purchase prices. The transaction will be at the same title company in the same hour. The buyer’s cash will be wired to the title company and immediately used to buy the office. Does Felicity need to hire a qualified intermediary, and whether you say yes or no, why?

Answer 1

This is a case of 1031 exchange.A 1031 exchange is one of a tax deferral strategies remaining available with the tax payers.The tax payers should never have to pay the federal income taxes on the sale of the property if they intend to reinvest the proceeds in a similar or like-kind replacement property. The basic idea is that if the investor didn't actually receive the proceeds to acquire a new property,then there isn't any income to tax.For a 1031 exchange transactions there is a condition that the purchase price price of the replacement property must be equal to or greater than the sale price of the property being sold.In a 1031 exchange usually 45 days are allowed to identify the replacement property.However it is not necessary to use them, we have an option to do a simultaneous 1031 exchange where we sell one property and acquire another at the exact same time.

The IRS requires the use of an exchange facilitator for a section 1031 exchange.So,technically speaking ,we dont need to use a qualified intermediary to facilitate a 1031 exchange.According to the IRS an exchange facilitator can act as a qualified intermediary.But this dosen't mean trying to complete a 1031 exchange without the services of a qualified intermediary is a good idea because the intermediary can represent us in court and 1031 being a complicated process,a qualified intermediary can ensure things happen in the proper order and that documentation is done correctly.

In the given question Felicity wants to buy the office building i.e replacement property for $ 2.2m and sell its land valued at $ 2m.The buyer's cash is also to be wired to the title company and immediately used to buy the office building.Felicity wants to close the purchase and sale of properties on the same day. The transaction will be in the same title company in the same hour which seems to be a simultaneous 1031 exchange.Also the buying value of the replacement property is more than the selling value of the existing property which satisfies the condition of 1031 exchange.So based on the above Felicity has to hire a qualified intermediary so as to facilitate a smooth and proper 1031 exchange .The intermediary is needed so he will do the following on his behalf:

a) acquire the original property.

b) Transfer the property to the buyer.

c) Hold the net sale proceeds in an escrow account.

d)Acquire the replacement property intended to buy from the seller.

e)Transfer the replacement property.

f) Ensure all exhange steps and doumentation occur in a timely manner.