Friendship Title regularly acts as an intermediary in executing tax-deferred real estate exchanges for real estate investors in the Washington, DC area. In this capacity, Friendship Title can assist with proper handling of proceeds from sales of investment properties in compliance with the Internal Revenue Code §1031.  These exchanges are commonly referred to as "like-kind", Starker, "tax-free"*, or tax-deferred exchanges.

To aid in your understanding of tax-deferred exchanges, and to help you decide if a tax-deferred exchange might be right for you, we have provided the following general information about these transactions.  Please contact us to answer any questions or to help you decide if your current investment property is eligible for a tax-deferred exchange.

Ordinarily, when you sell real property held for investment purposes, you will be taxed on the gain between the amount for which you purchased the property and the amount for which you sold the property.  If you intend to use the proceeds from the sale of such property to purchase additional investment property, it may be possible to defer the imposition of capital gains tax on these transactions.
 

Internal Revenue Code §1031
The Internal Revenue Code §1031 provides, "No gain or loss shall be recognized if property held for productive use in trade or business for investment (not including stock in trade or other property held primarily for sale, nor stocks, bonds, notes, choses in action, certificates of trust or beneficial interest, or other securities or evidences of indebtedness or interest) is exchanged solely for a property of a like kind to be held either for productive use in trade or business or for investment."  In other words, the Internal Revenue Service will not recognize (and therefore not tax currently) gain where an individual or entity exchanges one investment property (known as the "exchange" property) for another, similar investment property (known as the "replacement" property).

Starker Exchanges
A person or entity owning real property for investment purposes may wish to take advantage of IRC §1031, but may not have identified the "replacement" property.  The Internal Revenue Service has published Regulations which set forth specific provisions and deadlines which taxpayers must follow to satisfy the non-recognition provisions of IRC §1031. Friendship Title acts as the Qualified Intermediary, as authorized under the IRS Regulations, and holds the proceeds from the sale of the "exchange" property until a "replacement" property can be identified and purchased.

Friendship Title aids many taxpayers in taking advantage of the complex requirements and various deadlines of IRC §1031 and the relevant regulations.

Reverse Exchanges
Oftentimes, the owner of investment property has identified the "replacement" property before a buyer has been found for the current investment property.  In these cases, Friendship Title acts as the Exchange Accommodation Holder.  Instead of holding the funds, as in a traditional Starker exchange, Friendship Title holds either the "exchange" or "replacement" property until a buyer is found for the "exchange" property.

A common issue concerning investors interested in a Reverse Exchange is the resulting "double" transfer tax which results from transferring the property two times: (1) to Friendship Title and (2) to the ultimate purchaser. Friendship Title can assist in a smooth transaction involving a Reverse Exchange, while eliminating a double transfer tax penalty (Maryland).

This information is provided solely as a guideline and should not be relied upon in making any decisions concerning tax-deferred exchanges.  You should hire a competent attorney or accountant prior to making any decisions concerning tax-deferred exchanges or any other real estate matters. (back)

*Although these transactions are commonly referred to as "tax-free" exchanges, the tax is actually deferred.  When the replacement property is ultimately sold (rather than exchanged), the IRS recognizes the gain (or loss) between the purchase price of the original investment property and the sales price of the final replacement property.  Investors often link several tax-deferred exchanges together and never sell the replacement investment property without a tax-deferred exchange in place. In this instance, no gain (or loss) is recognized (if any) until the property is transferred at the investor's death at which time the property receives a "step-up" in basis and the beneficiaries of the property are taxed only on the difference between the sales price and the value of the property as of death, which regularly results in little or no tax. (back)