E & F Exchange, Inc.

On occasion, an investor must acquire a replacement property before disposing of the relinquished "sales" property. Perhaps the investor is first in line to acquire a "hot" replacement property and must close before getting the chance to market the investment property it plans to relinquish in the exchange. If the investor closes on the replacement property before closing on the disposition of the relinquished property, the transaction is a reverse exchange.

Since the IRS has not ruled on whether an investor can receive title to the replacement property while still holding title to the investment property to be relinquished in the exchange (a "true reverse" exchange), "parking" or "warehousing" arrangements have been devised to deal with this situation. An exchange intermediary such as E & F Exchange, Inc. can "park" or "warehouse" title to your replacement property and wait for you to sell your relinquished property.

The Reverse Exchange Process

1. You advance a cash "loan" to E & F Exchange ("E & F") and arrange for bank financing if need be to enable E & F to purchase the replacement property from the Seller. E & F documents your loan promissory note "IOU".
2. You assign your position as buyer under the purchase contract to E & F and E & F purchases the replacement property. E & F holds title to the replacement property for up to 180 days (if you elect the "safeharbor format") or up to 3 years (if you elect the "traditional format") pending the "sale" of your investment property. During this "holding period", E & F master leases the replacement property to you under a triple net lease and you, as master tenant, can sublease the replacement property to a subtenant, collect the rental income and provide property management services.
3. You market and arrange for the "sale" of your investment property and then assign your position under the sales contract to E & F. E & F, as the substituted buyer, receives the net sales proceeds. You convey the investment property directly to the Buyer.
4. You receive the replacement property from E & F.
5. E & F repays your IOU with the net sales proceeds received from Buyer in step 3.

180 Day Safeharbor Format
You can elect to have your reverse exchange transaction "blessed" by the IRS by following the suggested safeharbor format contained in Reverse Procedure 2000-37 issued by the IRS in October 2000. Under this safeharbor format, you have 180 days from the date E & F acquires the replacement property to dispose of your relinquished property and complete your exchange. The IRS cannot disallow your exchange transaction upon later audit if you follow the safeharbor format. This format provides you the greatest protection from IRS challenge.

3 Year Traditional Format
You can opt to forego the safeharbor protection and take up to 3 years to complete your exchange under the traditional format. The mechanical steps are the same under both formats except for the time periods (180 days vs. 3 years). Investors who choose the traditional format have ample time to market their investment property and closing their exchange without the time pressure of having to meet the 180 day deadline.

E & F can help you choose the exchange format which is right for you.

Frequently Asked Questions About 1031 Exchanges

What is a tax-deferred exchange?
The transfer of investment property in exchange for replacement investment property rather than for cash.

Why do a tax-deferred exchange?
The tax liability on the profit generated by the sale of investment property would be deferred until the replacement property is sold.

How do I know if an exchange will be beneficial to me?
It depends on the amount of profit generated by the sale of your investment property and your overall tax situation. Consult with a CPA or tax attorney.

Can I exchange my residence?
No. To qualify under Section 1031 of the Internal Revenue Code, property exchanged must be held for investment or business.

Do I need any special agreement of exchange?
Yes. You should consult an attorney to draft the appropriate exchange agreement.

Can I exchange more than one property and acquire more than one replacement property?
Yes.

Are there any additional closing costs or fees if I do an exchange?
Yes. They include the following: a) Attorney's fees for structuring the exchange and drafting exchange documents. b) Exchange fees for the accommodator. c) Duplicate closing costs for exchange portion and replacement portion.

Are there any special requirements to qualify for the benefits of a 1031 exchange?
Yes. Consult a CPA or tax attorney to determine whether you qualify.

Do I need to have the replacement property identified when I transfer ownership of my property?
No. Assuming you have the appropriate exchange documents in place, you have 45 days in which to designate your replacement property once your property has been transferred.

What happens if I cannot identify a replacement property within 45 days?
The benefits of a 1031 exchange will not be available to you and the transaction will be treated as a "Sale" for tax purposes.

When I find a replacement property, who signs the contract?
Your accommodator normally signs the contract to purchase the replacement property under the terms and conditions that are acceptable to you.

How long do I have to close escrow on the replacement properties?
You have 180 days from the date of the transfer of your property to close escrow on all of the replacement properties.

What is the function of an intermediary/accommodator/facilitator?
An accommodator, like E & F Exchange, Inc. acts to facilitate the exchange for many reasons. The following are a few reasons: a) Unless the purchaser of your property agrees to exchange a property he now owns or agrees to purchase one, you may not be able to effect an exchange. b) A delayed exchange without an accommodator could create special problems because of "Buyers Remorse" and/or "lurking" creditors of buyers attaching funds held.

Can a foreign individual do a tax-deferred exchange?
A foreign individual can do a tax-deferred exchange, but there are special requirements that must be met in order to avoid the 10% withholding of tax under FIRPTA. Consult a CPA and/or attorney who is familiar with FIRPTA and IRC 1031.

Do you report to the IRS on 1099 forms the interest accrued by the taxpayer pursuant to the exchange agreement?
Yes.