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Over 50 Years Of Experience With Like Kind Exchanges
Formed to meet the growing need for a local, responsive 1031 exchange agent
Independent Republic 1031, LLC was founded in 2023 by Horry County native and “reformed” tax attorney Thomas Stanley, who has over 25 years’ experience working with 1031 exchanges. For many years, Thomas provided clients with tax advice related to their like kind exchange and coordinated with national companies that served as the independent third party. With the emergence of Horry County as popular real estate investment market, Independent Republic 1031 was formed to meet the growing need for a local, responsive 1031 exchange agent. With over 50 years of experience handling like kind exchanges, our team is ready to assist you.
About Us
Independent Republic 1031 is an homage to Horry County, which many locals refer to as the “Independent Republic of Horry”. Bounded on the east by the Atlantic Ocean, south and west by the Little Pee Dee River, and on the north by the North Carolina state line, Horry County had a long history of being geographically, economically, politically and socially isolated up until the early 20th century (click here to learn more). Train lines, bridges and roads eventually connected visitors to the incredible beaches and interior regions of the county, but the moniker remains for a county that had to be self-reliant for most of its first 200 years of existence. Similarly, Independent Republic 1031 is an independent, third-party exchange agent ready to assist you and your tax advisor. Let us know how we can help.
Like Kind Exchanges
The like kind exchange is a popular tool for deferring federal and state income taxes that otherwise might be due upon the sale of real estate. When real estate owned for investment or in a trade or business is sold, the proceeds can parked with an third party agent for future reinvestment in replacement property that also will be used for investment or in a trade or business. While the general concept is simple, there are many rules and regulations that dictate how an exchange should be carried out to secure the potential income tax benefits.
The following is a brief overview of the rules for a like kind exchange, also known as a deferred exchange or a “1031 exchange”. This memo is meant to provide basic information on how like kind exchanges work. Each exchange is unique and presents specific challenges that must be addressed before tax deferral can be achieved. You should contact your tax advisor about the particular details of, and issues related to, your exchange.
Background
The government allows taxpayers to defer gain on the sale of real property “held for trade or business or for investment” when the proceeds from sale are reinvested in other real property the taxpayer intends to “hold for trade or business or for investment” purposes. The underlying premise behind a like-kind exchange is the taxpayer is exchanging properties of similar nature, or “like kind,” rather than liquidating an investment. Thus, the 1031 rules allow taxpayers to defer gain on the sale to some later date when the taxpayer ultimately sells the property in a taxable transaction.
When dealing with a like kind exchange, it is helpful to be familiar with the definition of some of the more common 1031 terms:
- Relinquished Property – the property being sold
- Replacement Property – the property being purchased with 1031 funds
- Exchange Agent (sometimes referred to as a Qualified Intermediary) – the independent third party used to hold 1031 funds during the exchange
- Identification Period – the 45-day period to find potential replacement property
- Replacement Period – the 180-day period to close on the purchase of replacement property
Like Kind Property
In the context of real estate, the term “like kind” has a very broad meaning. It encompasses both improved property (such as buildings or condos) and unimproved property (such as vacant lots or acreage) that is held for investment or business purposes. As a result, when selling real estate, taxpayers have a lot of flexibility when searching for replacement property. For example, you could sell a farm to purchase a commercial office building that will be rented, or you could sell a vacation rental condominium to purchase a vacant commercial lot that will be held for investment,
Held for Investment or for Business Purposes
Both the property to be sold and the property to be purchased must have an investment or business purpose. NOTE: The like kind rules do not permit the deferral of gain if the property being sold has been used as a primary residence or for other personal use, or the property being purchased is to be used as your personal residence or for other personal use. For that reason, a 1031 exchange might not work if the relinquished property or the replacement property is a second home or vacation home; you should consult your tax advisor to determine if a property qualifies as investment or business property.
At the heart of this determination is the taxpayer’s intent. To illustrate, if a vacation rental condo is sold to purchase a lake house that the taxpayer plans to use as a rental, but 6 months after purchase the taxpayer decides to take the lake house off the rental market and use it solely for its personal use, the IRS could challenge the 1031 transaction on the basis that the taxpayer did not intend to hold the replacement property for investment purposes. If replacement property is purchased with the speculative intent to “flip” the property soon after purchase, the IRS will take the position the transaction is not eligible for 1031 treatment on the basis the property was purchased “primarily for sale” and not with the intent to “hold” it for investment.
Note: if you are exchanging property that is not just real estate, such as when you exchange the land, building, equipment and inventory used in a business, the definition of “like kind” becomes much more complex and you should work closely with your tax advisor on the details of the exchange.
Simultaneous Exchanges and Deferred Exchanges
The simplest form of exchange is a simultaneous transfer of like kind properties between two parties; in reality, however, it is uncommon to find two parties willing to “swap deeds”. Most exchanges are “deferred exchange”. There are several variations of deferred exchanges, but all involve using a third party who is responsible for receiving the proceeds from the sale of relinquished property and helping reinvest the 1031 proceeds in replacement property.
Completing an Exchange
First, the taxpayer enters into an exchange agreement with the Exchange Agent, who must be an unrelated third party. After the taxpayer sells the relinquished property, the Exchange Agent holds the proceeds pending the purchase of one or more replacement properties.
Second, the taxpayer identifies potential replacement property and delivers the identification to the Exchange Agent within 45 days of the date of closing on the relinquished property. Taxpayers may identify: (1) up to three potential replacement properties of any value; or (2) any number of properties not exceeding in the aggregate 200% of the fair market value of the property you sold.
Third, the taxpayer must close on one or more replacement properties within 180 days of the closing date for the relinquished property. The Exchange Agent delivers the 1031 funds to the settlement agent and directs that the replacement property is titled in the name of the taxpayer. If the 1031 funds do not fully cover the cost of the replacement property, the taxpayer has to come up with the difference. On the other hand, unused 1031 funds are returned to the taxpayer after the exchange period is over.
Partial Reinvestment of Proceeds
If a taxpayer does not fully reinvest the 1031 funds, gain will be recognized to the extent of the proceeds not reinvested (but not to exceed the total gain realized on the sale). In other words, failure to completely reinvest the 1031 funds will result in tax being owed.
Nonresident Sellers
Generally speaking, when a seller who is not a South Carolina resident sells real estate located in South Carolina, the settlement agent at closing must withhold 7% of the reported gain and remit the withholding to the South Carolina Department Revenue. That said, state income tax on the gain from the sale can be deferred by a like kind exchange if certain rules are followed. If you are a nonresident seller, you should discuss the special requirements with our office or your tax advisor to ensure your sale is not subject to South Carolina income tax.
Debt
If you are selling property subject to a mortgage, there are special rules that require you to replace the debt with a loan on the replacement property being purchased. Failure to place a loan on the replacement property will trigger the recognition of gain on your transaction, just as if you did not fully reinvest the proceeds from the sale. You should consult with your tax advisor if you are selling property that secures debt.
Construction Exchanges
Occasionally, clients wish to use their proceeds to build improvements on property they already own or intend to buy. The like kind rules prohibit the use of proceeds to build improvements on property you already own. On the other hand, the use of proceeds to build on property you intend to purchase is allowed, though the rules are quite complex. If you think you will enter into a “construction exchange”, you must notify your tax advisor so the structure of the exchange can be planned carefully and the proper type of agent selected to assist with accomplishing the exchange.
Related Parties
If replacement property is purchased from a related person or entity, special rules determine whether the transaction qualifies as a like kind exchange. In addition, in the normal like kind exchange, there is no minimum holding period; however, when a related party is involved, you must hold the property for two (2) years or lose the tax deferral and recognize income and pay tax from the sale of the relinquished property. If you think you might be involved in a related party transaction, you need to talk with your tax advisor.
Tax Reporting
In addition to observing the like kind exchange formalities, clients must also report the like kind exchange to the IRS and South Carolina Department of Revenue. The exchange is reported as an attachment to the client’s income tax return, on Form 8824, “Like Kind Exchanges”. The exchange must be completed by the time the income tax return is filed; if the exchange is not completed by the deadline for the tax return, the return must be extended until the exchange is completed.
This site seeks to give you basic information on the like kind exchange process. It is not an exhaustive review; you should contact your tax advisor with any questions.
NOTE: Internal Revenue Code provisions on like kind exchanges prohibit 1031 escrow agents from offering specific tax advice. While we are happy to discuss general rules, procedures and scenarios for the completion of your 1031 exchange, you must speak with your CPA or other tax advisor regarding the possible tax consequences of your planned sale and reinvestment.
Contact Us
- P.O. Box 71166, Myrtle Beach, SC 29572
- Phone : 843-839-2494
- Fax: 843-692-8002
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Fri: 8 AM - 2 PM
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