As promised in last week's Tip on Commercial Real Estate Transactions, this week's Tip features a more detailed discussion of 1031 Tax Deferred Exchanges.

1031 Tax Deferred Exchanges
by Sarah Holdener, Esq.
When handling transactions where your client is contemplating a 1031 Tax Deferred Exchange, please keep in mind the following:

• 1031 Tax Deferred Exchanges are governed by Section 1031 of the Internal Revenue Code.  Sometimes referred to as "Starker Exchanges"  or like-kind exchanges, a 1031 Exchange provides a method for taxpayers to defer recognizing gain (or loss) on the sale of investment property.  This is not a tax avoidance mechanism, rather the capital gains tax is delayed or deferred to a later date.

• In order to qualify for a 1031 Exchange the property being sold (the "Relinquished Property") must be investment property; that is, it must have been held for investment or "productive use in trade or business."  Furthermore, the property being purchased (the "Replacement Property") must also be held for investment or productive use in trade or business.  The properties involved cannot be the taxpayer's current primary residence or current second/vacation home.

• Once the Relinquished Property has been sold, a disinterested third party ("Qualified Intermediary"), frequently the title company, will maintain possession of the sale proceeds until the Replacement Property is identified and purchased.  The proceeds of the sale must go through a Qualified Intermediary and not through the hands of the taxpayer or his/her agents or else the proceeds will become taxable.  Furthermore, all proceeds from the original sale must be reinvested in the Replacement Property - any cash retained by the taxpayer becomes taxable, which is why it is generally recommended that the Replacement Property be of equal or greater value than the Relinquished Property.

• The Replacement Property must be identified within 45 calendar days from the date of closing on the Relinquished Property and notice to the Qualified Intermediary must be given by midnight on the 45th day. The Replacement Property must be closed on within 180 business days from the date of closing on the Relinquished Property. If two or more properties are purchased in exchange for the original Relinquished Property, all purchases must be closed within 180 days from the date of closing of the Relinquished Property. Similarly, if multiple properties are being sold, the Replacement Property must be closed on within 180 days from the date of closing on the first of the Relinquished Properties.

• While Benchmark Title is ready and able to serve as the Qualified Intermediary for your clients' 1031 Tax Deferred Exchange, we recommend that anyone contemplating a 1031 Exchange also retain a tax attorney or accountant to ensure that the transaction qualifies for tax deferral under the Internal Revenue Code and makes fiscal sense for the taxpayer.

Any questions can be directed to Benchmark Title at 618-239-3750. Please feel free to call or email:

John Howe President Doreen Miller, Esq. Commercial Division Manager

Sarah Holdener, Esq. General Counsel, VP Production Michelle Null VP Escrow Operations

Serving you from three convenient locations:

Main Office: 1124 Hartman Lane Shiloh, IL 62221 Ph: 618-239-3750 Escrow Fax: 618-239-3707 Title Fax: 618-239-3757 Fax Orders: 618-310-1589 President: John Howe www.benchmarktitle.net

318 North Main St. Columbia, IL 62236 Ph: 618-281-9700 Fax: 618-281-9705 Manager: Randi Schur 4215 S. State Rte 159 Glen Carbon, IL 62034 Ph: 618-288-1695 Fax: 618-288-1852 Manager: Sara Sowell

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 Randi Schur is Manager and Escrow Officer for the Columbia, IL branch.  Randi joined Benchmark in April 2003 as a policy typist and has worked her way through the company as a title examiner, escrow processor and escrow officer (aka closer) in our Shiloh office before being promoted to Manager of the Columbia branch.  Randi was recognized in 2006 as one of Southern Illinois' Rising Stars by the Illinois Business Journal.  She resides in O'Fallon, IL with her daughter, Regan.  Randi can be reached at 618-281-9700 or by email at rschur@benchmarktitle.net.

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