The majority of Section 1031 Exchanges are closed as ‘Forward’ Exchanges (also referred to as ‘Delayed’, ‘Deferred’, or ‘Starker’ Exchanges).  A Forward Exchange occurs when the taxpayer first closes on the sale of the ‘Relinquished’ property prior to closing on the acquisition of the ‘Replacement’ property.  Most taxpayers prefer this order, as funds from the sale will be available to reinvest in the new property.  

Forward exchanges are sometimes referred to as ‘Starker’ exchanges because, before Section 1031 explicitly authorized forward exchanges, the courts first held that a forward exchange can qualify for tax deferral under Section 1031 in the case of Starker v. United States, 602 F. 2d 1341 (9th Cir. 1979). 

Please visit our Section 1031 Library for additional information regarding Forward Exchanges, including a brief summary of the Forward Exchange rules.

There are two very critical deadlines that must be carefully observed in order to successfully complete a Forward Exchange.  The taxpayer must: 
 

1.  Identify potential Replacement Properties, in writing to the Qualified Intermediary, no later than midnight on the 45^th day following the transfer of the Relinquished Property, and

 

2.  Close on the acquisition of the Replacement Property during the Exchange Period, which is defined as the EARLIER of: 

 (i)   180 days following the transfer of the Relinquished Property; or
 

         (ii)  The due date, with regard to extensions, of the taxpayer’s return for  the taxable year of the exchange.   Please review this important Notice if you will close on the sale of your Relinquished Property during the fourth quarter of your tax year.

Please note: These deadlines are not additive – it is not 45-days followed by another 180-days; secondly, every day counts, including weekends and holidays, when calculating the 45 and 180-day deadlines. 

The identification statement must be signed by the taxpayer and sent to the Qualified Intermediary during the 45-day Exchange Period.


Property Identification Rules

When identifying potential Replacement Properties in writing to the Qualified Intermediary, the taxpayer has the following options:
 

1.  Three Property Rule: Any three properties, regardless of their individual or aggregate value; or

 

2.  The 200% Rule: More than three properties, provided that their aggregate fair market value does not exceed 200% of the fair market value of the Relinquished property, or
 

3.  The 95% Rule: Any number of properties with no restriction on individual or aggregate value, provided that the taxpayer acquires properties whose value equals or exceeds 95% of the properties identified. This option is very rarely used.

Properties to be identified by the taxpayer are listed on the Identification Statement which is provided by Beacon Exchange Company.  The properties included on the ID Statement must be unambiguously described, including a unit number for condominiums. 

A property acquired by the taxpayer during the 45-day Identification Period is considered to be one of the identified properties.   

The Identification Statement can be rescinded in writing by the taxpayer during the Exchange Period, then resubmitted to include other properties.  The ID Statement cannot be accepted, rescinded, or revised after midnight on the 45th day following the transfer of the Relinquished property.

 

Closing a Forward Exchange
 

The basic steps involved in completing a forward exchange are as follows:

 

1.  Negotiate the purchase and sale agreement (the ‘Sale Agreement’) for your relinquished property.  Although Section 1031 Exchange ‘Cooperation Language’ is not required to be included in your Sale Agreement for a successful exchange, it may be useful to include this language in your Sale Agreement.  Please contact us if you would like to receive our suggested text.

 

2.  As Taxpayer, as Exchanger, enters into an Exchange Agreement with Beacon Exchange Company as the Qualified Intermediary. 

 

3.  The rights to the Sale Agreement are partially assigned to Beacon Exchange Company as Qualified Intermediary by an Assignment of Purchase and Sale Agreement, which is signed by the Exchanger and Beacon Exchange as the Qualified Intermediary, and is acknowledged by the purchaser of the Relinquished property. 

 

4.  At the closing (the ‘First Closing’), the purchaser remits the purchase price to acquire the Relinquished property in exchange for a deed to that property.  From these funds, the Exchanger's lender (if any) is repaid and the mortgage is released, the closing costs are paid, then the remaining funds due the Exchanger are transferred to an interest-bearing account opened by Beacon Exchange Company exclusively for this Exchange.  These funds will be held for benefit of the Exchanger until they are reinvested to acquire the Replacement Property.    

 

5.  Unless the Exchanger acquires the Replacement Property within the 45-Day Identification Period, the Exchanger must submit the Identification Statement to Beacon Exchange Company as Qualified Intermediary.  The ID Statement is due no later than midnight, 45-days after the date of the First Closing.

 

6.  The Exchanger negotiates and executes the Purchase Agreement for the acquisition of the Replacement Property.

 

7.  The rights to the Purchase Agreement are partially assigned to Beacon Exchange Company as Qualified Intermediary by an Assignment of Purchase and Sale Agreement. 

 

8.  At the Second Closing, Beacon Exchange will direct the seller of the replacement property to transfer title to the Replacement property to the Exchanger; the seller is paid out of the funds held in the account established upon the First Closing.  If any other funds are required, they are provided by the Exchanger or his lender.   

 
The Role of the Qualified Intermediary

 

Beacon Exchange Company, as Qualified Intermediary, will (i) review the facts of your exchange with your advisors and you; (ii) Provide the exchange documents required by Treasury Regulations; and (iii) Safeguard your exchange funds during the Exchange Period. 

 

For a Section 1031 Exchange to qualify under the Regulations, it is imperative that the taxpayer not have actual or constructive receipt of the proceeds from the sale of the Relinquished property.  If the taxpayer does receive the sales proceeds, actually or constructively, the taxpayer will be treated as having sold the relinquished property and purchased the replacement property rather than having completed a qualifying Section 1031 exchange.  

 

The use of a ‘Qualified Intermediary’ to facilitate a Section 1031 Exchange is one of the ‘Safe Harbors’ established by the regulations.

 

 

Summary

 

When considering a Section 1031 Exchange, it is important to understand all facets of your exchange well in advance of either the sale of your Relinquished property or the acquisition of your Replacement Property.  You first should understand your tax position relating to the sale to ensure that an exchange will benefit you.  You also should be very familiar with the time restrictions, the like-kind requirements, and the other rules that you must satisfy.

 

We invite you to call Beacon Exchange Company if you would like to review the facts of your exchange with us.