Daniel E. Hanley
Attorney at Law and Licensed Real Estate Broker for Exchanges

San Jose, California, Attorney at Law since 1974 and licensed Real Estate Broker and Private Lender since 1980. In addition to real estate exchanges, I specialize in elder law, estate planning law, real estate transaction law and small business matters. Call me now for a free phone consultation.

We are attorneys at law and a licensed real estate broker and private lender who specialize in all aspects of legal and real estate services relating to real estate exchanges including 1031 "like kind" and Revenue Starker reverse exchanges. Fidelity Exchange, Inc, our wholly owned California Corporation is a Qualified Intermediary.

Under Internal Revenue Code Section 1031, an owner of highly appreciated rental, commercial, industrial, or unimproved land can exchange their property for cash but defer the income tax by using the cash to buy property of the same type. The process involves the use of a Qualified Intermediary (QI). Our wholly owned company Fidelity Exchange, Inc is a QI under regulations of the US Internal Revenue Service. This is referred to as a "like kind exchange" and can result in substantial income tax savings.

For example, assume that you acquired a duplex in San Jose, California in 1985 for $250,000. Say you took $100,000. in depreciation. If you sold the property today for $850,000., then you would have to pay taxes on the gain -- the difference between what you paid for the house (less any depreciation) and what you sold it for, or $700,000. Under current tax rates, this equates to State and Federal taxes of $175,000.

However, you are also considering acquiring a small strip mall in Eugene, Oregon. The property is priced at $900,000., but you believe that you can acquire it for $850,000.

By structuring the transaction as a "like kind exchange," you can acquire the strip mall in Eugene, Oregon without having to pay any Federal or State income tax. The tax is deferred until the Eugene property is sold and not reinvested in "like kind" property. Therefore, you can defer the tax bill until you are ready to "cash out" of your investment.

In order to qualify for a "like kind exchange," you need to employ a Qualified Intermediary ("QI") to handle your transaction.

Fidelity Exchange, Inc, our wholly owned California Corporation is a Qualified Intermediary.

The transaction will typically have two phases.

Using the above example, you would enter into a contract with the buyer of your San Jose, California duplex for the agreed upon purchase price. As part of the contract, the buyer should agree to work with you on your Internal Revenue Code Section 1031 exchange. This does not impose any cost or liability on the buyer.

Prior to the Close of Escrow ("COE") on the San Jose property, you engage the services of your QI to structure the transaction. The QI prepares an Exchange Agreement and the Escrow Instructions for both you and the buyer to execute.

At the COE, the QI receives the cash from the buyer and the buyer receives the deed to the San Jose property. Phase I of the Exchange is complete.

Phase II includes the subsequent reinvestment of the cash into property of "like kind." First, you need to identify the property within 45 days of the COE. Using the above example, you would need to identify the strip mall in Eugene, Oregon that you want to acquire in exchange for the San Jose duplex. You need to identify the property in writing to your QI.

Once the property is identified, it also needs to be purchased. Under the Internal Revenue Code, you also need to close Escrow on the property within 180 days. While you handle to negotiations such as purchase price, the QI is responsible for wiring the money from the first purchase into Escrow.

If you meet the deadlines set forth above and the other requirements of the law, then you will defer income tax on the transaction. In effect, it is an "interest free" loan of the tax that would have been due upon the initial sale. In the above example, the government would essentially be loaning you $210,000.

Fidelity Exchange, Inc, our wholly owned California corporation, has handled thousands of transactions involving residential, commercial, industrial, and unimproved real property since 1984.

The law is very flexible on the type of real property that can be exchanged. For example, we once structured an exchange of a 55-year lease of low income housing for a winery. The main criteria that the IRS employs is that the property must be of "like kind." As long as the properties are "like kind" then the following is possible:

Improved to unimproved.

Tenants in Common for 100% fee interest.

Residential for Commercial or Industrial.

If you are contemplating an exchange, please seek the services of a competent professional.

In the example above, suppose that you have located and want to acquire the Eugene, Oregon strip mall but have not found a buyer for your San Jose duplex. The Oregon buyer will not wait for you to sell your San Jose duplex because she has other potential buyers that are anxious to acquire it. You are not out of luck.

The IRS has authorized a procedure known as a Revenue Starker Exchange that will defer the tax on the disposition of the San Jose duplex even if it is sold after you acquire the Eugene strip mall.

This also involves the use of a QI. Please seek competent professional advice in this area. For your information, the procedure is set out in Rev. Proc. 2000-37, 2000-40 IRB 308.

In addition to real estate exchanges, our firm also offers a full range of legal, real estate and loan related services including bankruptcy, foreclosure, elder law, estate planning, probate, real estate loans, real estate transactions and small business matters.

If you have questions about like kind and reverse real estate exchanges, please do not hesitate to contact our San Jose attorney and licensed real estate broker today. Call us now for a free phone consultation at 408-293-0344 or contact us via e-mail by filling out the form on the Contacts page and a representative from our office will reply immediately.

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