Tamalpa Exchange Group

The exchange of real property under Section 1031 of the Internal Revenue Code allows the Exchanger (taxpayer) to avoid the loss of equity resulting from payment of taxes upon the sale of the Exchanger's property. The Exchanger may invest the entire equity accrued in his or her investment (relinquished) property in a new investment (replacement) property without realizing taxable capital gain on the theory that the Exchanger's "continuity of investment" should be recognized.

There are three types of tax-deferred exchanges: delayed, simultaneous and reverse.

The delayed exchange is the most frequently used type of exchange and is supported by statutory amendment pursuant to the Tax Reform Act of 1984 and the Treasury Regulations for Section 1031 (a)(3) issued April 12, 1991. A delayed exchange is often referred to as a "Starker" exchange after the landmark U.S. Supreme Court case which first upheld the concept of a delayed exchange.

The two critical elements of a delayed exchange are structure and timing. The primary rules for completing a successful tax-deferred, delayed exchange include the following:

1. Each parcel of real property in the exchange must be held for investment or for use in a trade or business. A personal residence and real property held as inventory will not qualify.

2. The replacement property must be "like kind" to the relinquished property. The definition of "like kind" real property is currently very broad. For example, an exchange may be made between commercial and residential property, and between unimproved and improved real estate. However, foreign real property cannot be a part of a deferred exchange nor can personal property be exchanged for real property.

3. An exchange must be made. Many Section 1031 exchanges fail because they are structured in such a way that, conceptually, no exchange occurs. A Qualified Intermediary is particularly useful in establishing the existence of an exchange.

4. The timing requirements must be strictly met. The replacement property must be properly identified within 45 calendar days and escrow must close within 180 calendar days (or the date of filing Exchanger's tax return plus extensions) within the close of escrow of the conveyance of Exchanger's relinquished property.

5. To defer recognition of all gain, the Exchanger (1) must purchase replacement property of equal or greater value than the net sales price of the relinquished property and (2), must wind up with equity in the replacement property that is equal to or greater than the equity that was present in the relinquished property.

6. The Exchanger's intent to exchange, not sell and reinvest, must be reflected in the documentation of the "sale" and "acquisition" transactions. It is critical that all transactions be mutually interdependent as established by this documentation, e.g. the real estate listing, purchase agreements, exchange agreement with Intermediary, etc.

Build-to-suit Exchange

In a "build-to-suit" delayed exchange, the Exchanger wishes to improve the replacement property with part of the net equity from the relinquished property. Part of the equity from the relinquished property is used for the down payment on the replacement property and the balance for capital improvements. These improvements need to be made within the 180-day period before completing the exchange. A Qualified Intermediary can play an integral part in a "build-to-suit" scenario.

Tamalpa Exchange Group does not participate in "build-to-suit" delayed exchanges, but it can refer you to Qualified Intermediaries which do.

Reverse Exchange

The reverse exchange involves acquisition by the Intermediary of the replacement property before the relinquished property is conveyed. The Internal Revenue Service recently issued a revenue procedure (No. 2000-37) which provides a safe harbor for the qualification of a reverse exchange. The IRS will not challenge the reverse exchange if both properties are held in a Qualified Exchange Accommodation Agreement ("QEAA"), which is described in this revenue procedure. Certain time frames, roughly analogous to those of a delayed exchange, are made part of the QEAA. If the Exchanger meets these time limitations, and other rules of the revenue procedure, his exchange will not be challenged by the IRS.

There are two basic scenarios for reverse exchanges. In both scenarios, the exchange begins with the Intermediary acquiring the replacement property. The Exchanger can furnish the money necessary for this purchase. In the "parking motif," the exchange will not occur until the Exchanger finds a buyer for the relinquished property. At that time, the Exchanger then transfers the relinquished property (and agreement to sale) to the Intermediary in exchange for the Replacement Property. The Intermediary then completes the sale of the replacement property.

In the second scenario, the relinquished property (and agreement to sale) is first transferred by the Exchanger to the Intermediary. At the time the Intermediary then completes the sale of the relinquished property, a simultaneous transfer of the replacement property is made by the Intermediary to the Exchanger.

While Tamalpa Exchange Group does not participate in reverse exchanges, it can refer you to Qualified Intermediaries which do.

Partnership and Corporation Interests

While an ownership interest in a partnership, corporation, limited liability company or trust may not be exchanged, the entity itself may exchange property it owns for other property it wishes to hold.

Non-tax Benefits of Exchanging

Tamalpa Exchange Group ("TEG"), as a Qualified Intermediary, acts as a principal in the exchange transaction for a fee. TEG first enters into an Exchange Agreement with the Exchanger. Pursuant to this agreement, the Exchanger typically assigns the purchase agreement for Exchanger's relinquished property to TEG which in turn conveys title to the buyer at close of escrow. TEG then receives the net sales proceeds (net equity) directly from the escrow-holder, where the net proceeds are placed into a bank impound account controlled by TEG. Exchanger's rights to the cash in this impound account are severely restricted according to standards set forth in the regulations to Section 1031. If the Exchanger properly identifies a replacement property within the 45-day period, TEG will purchase that property with the impounded cash. At close of escrow on the replacement property, TEG will immediately convey this property to the Exchanger. If Exchanger does not identify a replacement property within the 45-day period, or does not close escrow within the 180-day period, TEG delivers the impounded cash to Exchanger.

Tamalpa Exchange Group, an experienced Intermediary, provides the following services for the Exchanger:

1. Answers important questions by investors and their advisors considering an exchange prior to entering into a contract.

2. Assists in transaction structuring through its tax counsel who is the founder and owner of Tamalpa Exchange Group.

3. Provides prompt answers to Exchanger at any stage of the exchange transaction.

4. Reviews escrow documentation through its tax counsel to assure compliance with the tax law.

5. Preserves and transfers the Exchanger's total equity together with a market-rate growth factor into the replacement property.

6. Eliminates the risk of constructive receipt of sales proceeds, which protects the exchange's deferred status.

7. Carefully monitors the 45-day and 180-day rules.

8. Communicates and coordinates with the escrow companies, real estate brokers and advisors of the Exchanger who are involved in the exchange, resulting in a smoother and simplified transactions.

9. Participates in both local and multi-state exchanges.

At the present time, Tamalpa Exchange Group charges the Exchanger a fee of $500 for an exchange where two escrows are involved. An additional fee of $200 is charged for each additional escrow involved. For example, if one property is exchanged for two replacement properties (three escrows), the total fee will be $700. If an escrow is started, but later canceled, for either a relinquished property or for a replacement property, such escrow nevertheless is deemed an "involved escrow" for the purpose of fee computation.

The entire fee is due at close of escrow for a relinquished property and is payable out of the impound account funded with the net sales proceeds from that relinquished property.

The interest earned on the sales proceeds (net equity) held in the impound account is not distributed to the Exchanger.

The services provided by TEG do not include legal services that are connected with, but are not an integral part of, the exchange. Examples of such connected, non-integral legal services would include the enforcement of a purchase agreement, eviction of a tenant, clearing title to a property, arranging financing, reviewing leases and arranging inspections and studies. The regulations to Section 1031 allow an attorney, or that attorney's controlled corporation, acting as an Intermediary, to provide legal services "with respect to an exchange of property intended to qualify for non-recognition of gain or loss under Section 1031."

If requested by the Exchanger, attorney George H. John, who owns Tamalpa Exchange Group, will provide separately-billed legal services to the Exchanger if these services are sufficiently connected with, and performed "with respect to", that exchange.

Non-connected services provided by the attorney during a period of two years which ends on the date of close of escrow of the relinquished property will disqualify the attorney from acting as a Qualified Intermediary.

Tamalpa Exchange Group is solely owned by George H. John, a California-licensed attorney. Mr. John has a Masters degree in tax law from Golden Gate University Law School. He is also a Certified Specialist in Estate Planning, Probate and Trust Law.

Mr. John has practiced in the area of tax-deferred real estate exchanges for over nineteen years. He frequently speaks before real estate professionals and real estate investor groups. He is also a licensed California real estate broker.

TAMALPA EXCHANGE GROUP