GLOSSARY | BANK GUARANTEE | ID CHECKLIST | CALCULATOR
FREQUENTLY ASKED QUESTIONS
- What security does Amherst provide for the funds it holds?
- How does Amherst handle the funds it holds?
- What about interest generated by the exchange funds?
- What are the basic IRS requirements for an exchange?
- What are the time requirements for an exchange?
- To avoid paying ANY tax, how much must be spent on replacement property?
- What do you mean, “I must replace debt?”
- What happens if I buy down, take on less debt and/or receive some of the cash?
- How can I avoid tax if I want to reduce my debt?
- Can I take on extra debt in order to receive cash and still avoid paying any taxes?
- Can I sell more than 1 property and/or purchase more than 1 property in an exchange?
- What property does NOT qualify for an exchange?
- Can a property be part personal residence and part investment?
- How are you insured?
- Why would I use Amherst rather than one of the large QIs owned by a title company?
- What security does Amherst provide for the funds it holds?
We have always segregated accounts and have always offered dual signature accounts. Funds are 100% secured by a “Bank Guarantee” offered at no charge by a selection of banks. The Guarantee simply states that funds deposited into an Amherst account are guaranteed to be available to purchase Replacement Property. The bank will reimburse you for any losses.
Funds cannot be transferred until the bank receives signed instructions from you and from Amherst. The 2 instructions must be identical or funds cannot be moved. It's simple and effective.
Amherst is also covered by Errors and Omissions Insurance.
- How does Amherst handle the funds it holds?
The funds from each exchange are placed in a separate segregated account. We have never commingled exchange funds.
- What about interest generated by the exchange funds?
Our clients receive the highest interest in the industry. Our banks help us in this way so we can better serve you.
- What are the basic IRS requirements for an exchange?
A) The sale of “relinquished property” (the property being sold) and purchase of “replacement property” (the new property being purchased) must be interrelated. You may not simply sell a property and later purchase another property.
B) An independent 3rd party, a Qualified Intermediary (or QI) must facilitate your exchange. The QI creates documentation that meets all IRS exchange guidelines including establishing the required interdependence of your sale(s) and purchase(s) and the right of the QI to receive and control the funds.
C) You may not have actual or constructive receipt of the “exchange proceeds” (funds); the QI must control the money. We fully protect your funds even though they must remain under the control of Amherst during your exchange.
D) All properties must be qualifying “like-kind” property held for investment. Like-kind in the context of real estate means real property for real property (an apartment complex can be traded for raw land, or a triple net leased commercial property or a single family dwelling). In personal property exchanges like-kind (or like-class) have more specific requirements, for example, an antique Ferrari for an antique Ferrari.
Non-qualifying property (property that cannot be exchanged) includes:
1. Your personal residence
2. “Dealer property” held for resale
3. Foreign property (though foreign property can be traded for foreign property)
- What are the time requirements for an exchange?
IDENTIFICATION PERIOD: Replacement property (the new property being purchased) must be identified in writing within 45 days of the transfer of the property being sold.
EXCHANGE PERIOD: Replacement property must be purchased within 180 days of the transfer of the property being sold.
Filing your tax return closes your exchange! If your tax return becomes due before you can purchase replacement property you must file for an extension to give yourself time to complete the exchange before filing your return.
There are no extensions to the time requirements. Weekends and holidays count the same as business days. Family illness or other extenuating personal circumstances are not considered. The 45 and 180 day requirements are fixed, UNLESS there is a national or regional disaster. The President of the United States and the IRS have in recent years granted extensions for circumstances such as 911 and the Katrina flooding.
- To avoid paying ANY tax, how much must be spent on replacement property?
EQUAL OR GREATER PROPERTY VALUE: If you sell a property for $500,000, and you pay $35,000 in commissions and closing costs, the “adjusted value” = $465,000. To avoid paying ANY tax, you must purchase property of this value or greater.
DEBT RELIEF MUST BE REPLACED: If you pay off a loan when you sell, the IRS requires you to take on equal or greater debt when you purchase replacement property or replace that debt with “out of pocket” cash.
CASH MUST BE UTILIZED: All cash proceeds from your sale(s) must be used in your purchase(s) to avoid paying any taxes.
IMPORTANT REMINDER: You must balance all 3 items to avoid paying ANY tax – Adjusted Property Value, Debt Relief and Cash.
- What do you mean, “I must replace debt?”
It often comes as a surprise that just spending all the cash on the new property is not enough to defer taxes. “Debt relief” (the loan(s) you pay off when you sell property) is every bit as taxable as cash received. If you pay off a loan of $500,000 and take on a loan in the new property of $300,000, there is potential for a $200,000 taxable event.
- What happens if I buy down, take on less debt and/or receive some of the cash?
If you purchase property of lesser value, there will be less new debt or excess cash or a combination of both. Debt relief and unused cash are called “boot” and are taxed. You defer the tax on all but the boot.
- How can I avoid tax if I want to reduce my debt?
You can add cash of your own to offset debt relief.
- Can I take on extra debt in order to receive cash and still avoid paying any taxes?
No. If you take on more debt than you need and there is excess cash after your final purchase, the cash you receive is taxable.
- Can I sell more than 1 property and/or purchase more than 1 property in an exchange?
YES. You can sell 1 and buy 4, sell 10 and buy 1... To avoid paying ANY tax, balancing an exchange involving multiple properties boils down to balancing the aggregate of the 3 basic attributes:
1) Total ADJUSTED PROPERTY VALUE(S) SOLD
2) Total DEBT RELIEF (loans paid off)
3) Total CASH (exchange proceeds)
Must be equal to or greater than:
1) Total ADJUSTED PROPERTY VALUE(S) PURCHASED
2) Total NEW DEBT
3) Total CASH UTILIZED
- What property does NOT qualify for an exchange?
Only your personal residence, re-sale property, foreign property, and personal property are excluded. A partnership interest is personal property, so though a partnership can exchange as a whole, the individual partnership interests are non-like kind to real property and therefore do not qualify.
- Can a property be part personal residence and part investment?
This is a common scenario – a main house can have several rented guest houses, a ranch parcel can have a residence and a working avocado orchard or cattle ranch – there is no end to the possibilities. The commercial percentage of the property can be exchanged.
- How are you insured?
Our Bank Guarantee and Errors and Omissions Insurance protect you better than any bond. Funds are 100% safe.
We continue to find bonds more about window dressing than actual protection. They commonly cover employee theft, not owner misappropriation when history demonstrates it is owners who commit the crimes.
Once funds are “missing” it takes years to unwind the details and locate any remaining assets, so even assuming the bond pays off (often not the case) all exchanges involved will not meet the time requirements for completion thereby triggering capital gains taxes for the victims.
Victims suffer the loss in the year their attempted exchange fails. They incur taxation on capital gains even though their money is missing. Some could be sued by angry sellers who have binding contracts – another expense to bear. The offsetting credit for lost funds comes when the IRS deems the loss completely uncollectible which can be several years later. If any form of insurance or bond pays off, it is often well after the fact and can be a fraction of the amount lost.
An exchange requires creative protection because of the immovable time requirements. We carry several million in Errors and Omissions Insurance, but like bonds, timing will not preserve an exchange.
We are about substance, not show. The Bank Guarantee requiring the client’s written approval of any movement of funds from the segregated account protects the funds before they can be misappropriated.
- Why would I use Amherst rather than one of the large QIs owned by a title company?
We are located in the center of a highly respected real property law firm in Santa Barbara, California, so our access to legal advice is instantaneous. Your attorney and/or CPA can problem solve with one of our experts.
We offer individualized, knowledgeable, creative service and can be much more responsive to the specific needs of each exchange. Because we are independently owned we comfortably work with all tax advisors, title and escrow companies, and a variety of banks. This gives you more choices and better customized service.
