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FREQUENTLY ASKED QUESTIONS

  1. What security does Amherst provide for the funds it holds?
  2. What are the basic IRS requirements for an exchange?
  3. What are the time requirements for an exchange?
  4. To avoid paying ANY tax, how much must be spent on replacement property?
  5. What do you mean, “I must replace debt” ?
  6. What happens if I buy down, take on less debt and/or receive some of the cash?
  7. How can I avoid tax if I want to reduce my debt?
  8. Can I take on extra debt in order to receive cash and still avoid paying any taxes?
  9. Can I sell more than 1 property and/or purchase more than 1 property in an exchange?
  10. What property does NOT qualify for an exchange?
  11. Can a property be part personal residence and part investment?
  12. What exchange language do I need to include in the Contracts to Sell and Purchase property in an exchange?
  13. Does Amherst handle personal property exchanges?
  14. What is a Reverse Exchange?
  15. Why would I use Amherst rather than of one of the large QIs owned by a title company?

 

  1. What security does Amherst provide for the funds it holds?

    Our business practices have always been client-centered. We have always segregated accounts and structured transactions to protect the funds where they sit. Our Qualified Trust Accounts offer an additional layer of protection. Funds can also be secured by a “Bank Guarantee.” The Guarantee simply states that funds deposited into an Amherst account are guaranteed to be available to purchase Replacement Property.

    Amherst also carries several million in Errors and Omissions Insurance. Bonding has proven ineffective due to exchange time requirements. It is best to protect and secure the funds where they sit, in segregated, easily visible bank accounts.

  2. 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. Our Bank Guaranty fully protects your funds even though they must remain under the control of Amherst during your exchange.

    D) All replacement 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; a triple net leased commercial property can be traded for a single family dwelling). In personal property exchanges like-kind (or like-class) has more specific requirements, for example, an antique Ferrari can only be traded 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); domestic property is not like-kind to foreign property and vice versa

  3. 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.

  4. 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 a loan is paid off when you sell, the IRS requires you take on equal or greater debt when you purchase replacement property. You may replace some or all of the debt relief 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.

  5. 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 a loan on the new property of $300,000, there is potentially a $200,000 taxable event.

  6. 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. 

  7. How can I avoid tax if I want to reduce my debt?

    You can add cash of your own (“out-of-pocket”) to offset debt relief.

  8. 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.

  9. 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

  10. What property does NOT qualify for an exchange?

    Only your personal residence, re-sale property, foreign property, and non-like kind 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 and therefore do not qualify.

  11. 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.

  12. What exchange language do I need to include in the Contracts to Sell and Purchase property in an exchange?

    It is required that the cooperating parties (Buyer of the property being relinquished; Seller of the Replacement Property) are aware they are part of your exchange. There is no specific language provided by the I.R.S. so keeping it simple is the best tactic. The “cooperation” is strictly acknowledging awareness of the exchange. Years ago, cooperation was much more involved and potentially risky for the non-exchanging participants. Today, there is no risk or liability for this roll, but notification is still required.

    Language to include in a Contract to SELL:
    Buyer agrees to cooperate in Seller’s I.R.C. Section 1031 Tax Deferred Exchange by acknowledging receipt of documents deemed necessary to the Exchange, at no cost, liability or time delay to Buyer.

    Language to include in a Contract to PURCHASE:
    Seller agrees to cooperate in Buyer’s I.R.C.Section 1031 Tax Deferred Exchange by acknowledging receipt of documents deemed necessary to the Exchange, at no cost, liability or time delay to Seller.

  13. Does Amherst handle personal property exchanges?
    Yes, from antique automobiles and corporate jets to radio air waves and rock ‘n’ roll memorabilia, we handle a wide variety of personal property exchanges. 

  14. What is a Reverse Exchange?
    In order to PURCHASE property before you are able to SELL the “old” property you must utilize an Exchange Accommodation Titleholder (“EAT”) in one of two prescribed structures.

    Exchange First: The EAT takes title to the property to be sold and is the Buyer in the standard “forward” exchange. The exchange takes place up front, Exchange First, so the taxpayer can place permanent financing and take title to the new property. The EAT warehouses the Relinquished Property until it can be sold.

    Exchange Last: The EAT takes title to the new property and warehouses it until the Relinquished Property can be sold. There is no guess work in placing a value on the “old” property, which tends to be a favorable scenario for many tax advisors. The exchange takes place at the end of the Reverse Exchange, thus the name Exchange Last. When the “old” (warehoused / parked) property sells, the EAT is the Seller of the Replacement Property to the taxpayer in a standard concurrent exchange.

  15. Why would I use Amherst rather than of one of the large QIs owned by a title company?

    Most importantly, we are located in the center of a highly respected real property law firm in Santa Barbara, California, so our access to creative legal advice is instantaneous. It is great to be able to put you, your attorney and/or your CPA on the phone with one of our experts to quickly brainstorm and solve any problems that arise.

    No two exchanges are alike. We offer individualized, knowledgeable, creative service and can be much more responsive to the specific needs of each exchange. Because we are an independently owned “boutique” QI we comfortably work with all tax advisors, title and escrow companies, and a variety of banks. This gives you more choices and better-customized services. We do not have to establish cookie-cutter solutions for a fleet of nationwide offices; we are customized exchange specialists.

 

 

 

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