Independent Exchange Services, Inc.
Since 1980, Independent Exchange Services, Inc. (IES) has partnered with our clients to provide industry leading practices of Section 1031 exchange services. We provide each client with innovative tax deferral strategies tailored to their particular circumstances, unparalleled professionalism and secure guardianship of principle.
No matter what size exchange or its degree of complexity, our clients are confident in knowing that their transaction is facilitated by a professional staff that has successfully participated in thousands of 1031 transactions for over 40 years of business.
The IES Exchange Transaction
Independent Exchange Services, Inc. acts as a third-party Qualified Intermediary in an exchange. As a principal in the transaction, IES acquires the Phase I relinquished property from the Exchanger and transfers the property to the buyer. IES receives the cash amount of the equity from the buyer at close of escrow and issues an Exchange Credit for that amount to the Exchanger. Upon purchase of the Phase II replacement property, IES again acts as the principal in the transaction, provides cash to acquire the Phase II property and transfers the property to the Exchanger.
IES cares about security. Standard documentation is straightforward and clearly defines the role and responsibilities of IES as a facilitator in helping the Exchanger to complete a successful exchange. Funds are invested with the trust department of a major commercial bank for safety and protection. Special accounts requiring co-signors are available if desired.
Step 1 – Relinquished Property - Agreement and Assignment - To setup the sale of your relinquished property (the property you are proposing to sell), as soon as a real estate contract and preliminary title report have been prepared, those are the initial documents IES needs to get your exchange started. In addition to the contract and preliminary title report, we will need all contact information for the team that is working on the exchange for our client – Real Estate Broker, Title / Escrow Officer, CPA, Attorney and all current contact information for our client. Once IES has all this information, we will prepare an Exchange Agreement and Assignment of Real Estate.
Step 2 – Estimated Settlement Statement – Once the relinquished property real estate transaction is ready to close, IES will review the estimated settlement statement with our client to insure it is structured properly for our client and the exchange. Upon close of escrow funds will be wired to IES and IES will provide a statement of exchange credit balance to our client.
Step 3 - Close of Escrow and Statement of Exchange Credit balance - Once a transaction closes escrow and funds have been sent to IES, IES will prepare a Statement of Exchange Credit Balance, so our clients can see their current funds held by IES and the letter they receive will outline their 45 Day and 180 Day due dates to track for their exchange.
Step 1 – Replacement Property – IES will assist our client to execute their Replacement Property Identification forms within 45 days from the close of escrow on the relinquished property. Once our clients have prepared their replacement property(ies), IES will require the real estate contract and preliminary title report for the replacement property(ies) and from these documents IES will create the Phase 2 Addendum and Assignment.
Step 2 – Estimated Settlement Statement – Once the replacement property real estate transaction is close to closing, IES will review the estimate settlement statement with our client to insure it is structured properly to protect against any potential boot for our client. Upon close of escrow, IES will wire funds to title/escrow to complete the real estate transaction.
Step 3 - Close of Escrow and Completion of Exchange - Once escrow is completed and funds have been transferred for the purchase of our clients replacement property, then after all final paperwork is processed and completed, the exchange is completed and closed out.
Requirements of Qualified Intermediary
Under Section 1031 of the Internal Revenue Code, the use of a “Qualified Intermediary” provides a “safe harbor” (presumption that the Section 1031 exchange is valid and will be allowed) for the taxpayer’s exchange. The QI has to be a person who is truly “independent”, and, to ensure financial security, should be a bonded and insured corporation that engages in no other business.
IES, as a QI, is treated as a “principal” in the transaction, and is deemed to be the “seller” of the taxpayer’s old property (called the “Relinquished Property”); IES will receive the taxpayer’s net equity (the “Exchange Proceeds”) when the Relinquished Property is sold to the buyer.
And, when the taxpayer has identified and is ready to purchase the new property (called the “Replacement Property”), IES will be treated, for tax purposes, as the buyer and will deposit the Exchange Proceeds on behalf of the taxpayer to purchase the Replacement Property.
Although IES is treated as a ‘principal’ for tax purposes, IES does not take title to either property, does not negotiate the sale or purchase agreements, does not qualify for or obtain any financing, or otherwise get involved in the non-exchange aspects of either the sale of the Relinquished Property, or the purchase of the Replacement Property. With our Exchange Agreement and ancillary documents, and our receipt and disbursement of the Exchange Proceeds, the client’s exchange process will (subject to the taxpayer meeting the time deadlines and subject to the Replacement Property satisfying other requirements), will satisfy the requirements of Section 1031 to achieve tax-deferral.
During the time IES holds the taxpayer’s Exchange Proceeds, they are held in accounts at major commercial banks and/or trust companies. In addition, IES carries Errors & Omissions insurance, and a surety (fidelity) bond. For larger transactions, IES will establish other mechanics to provide additional security and comfort to the client (qualified trusts, dual-signature accounts, etc.).
Terminology
Deferred gain: Amount of “realized gain” that is not currently taxable.
Like Kind: No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for ‘like-kind’ property which is to be held either for productive use in a trade or business or for investment.
Section 1031: Section 1031 of the Internal Revenue code provides that tax on gain from the sale of real or personal property held for investment or business purposes can be deferred if the property is exchanged (rather than sold) for other like-kind property.
Qualified Intermediary: A third party or facilitator who is an independent principal who assists in completing a successful section 1031 tax-deferred exchange.
Realized gain: Difference between sales prices and adjusted tax basis.
Recognized gain: Amount of “realized gain” that is currently taxable.
Relinquished Property: The property the Exchange is selling. Also called the old property.
Replacement Property: The property the Exchanger is buying. Also called new property.
We have expertise in the following types of transactions:
- Delayed Exchanges
- Simultaneous Exchanges
- Reverse Exchanges
- Improvement Exchanges
- International Exchanges
IES FAQ
We like to work with our clients as early as possible. As soon as you start to plan for an up coming transaction, we welcome an initial consult call to discuss your specific deal details and find out about the goals you want to accomplish with your upcoming 1031 exchange.
“Section 1031 of the IRS tax code allows you to defer taxes on capital gains from the sale of investment properties if all the proceeds are promptly invested in replacement properties. Basically, you’re deferring the taxes until you sell the new property.”
“Vacant or raw land that’s held for investment purposes qualifies for a 1031 exchange. Properties you’re renting out qualify, but a primary residence or vacation home doesn’t.”
“You have to decide to engage in an exchange before you sell the relinquished property. If you sell the property before deciding to do an exchange, you can’t defer the capital gains by investing in the new property—the transaction has been completed and you’ve acquired the tax liability.”
“It’s complete when you close on the replacement property.”
“No. The rule is, after paying off the mortgage, all the net proceeds from the sale must go into the replacement property. That means the new property must be of equal or greater value than the relinquished property. If you have the cash to pay the difference, you don’t need to have a mortgage on the replacement property.”
“Yes. We warehouse the proceeds from the sale in client accounts and apply them to the purchase of a replacement property.”
“Yes. There are two deadlines, one at 45 days and another at 180 days. Starting from the day of the sale, you have up to 45 calendar days to identify one or more replacement properties. You have to close on one of the identified properties within 180 calendar days. If you miss either of these deadlines, you incur the capital gains tax liability from the sale. The deadlines are pretty much set in stone and can only be waived in cases where a natural disaster affects the property. Personal emergencies don’t count.”
IES Process
- IES will prepare an Exchange Agreement and Assignment of Real Estate for our client
- IES will review the estimated settlement statement for the relinquished property with our client
- Upon close of escrow, funds are wired to IES
- IES provides a statement of exchange credit balance to client
- Client will identify and document replacement property / properties
- IES will create the Phase 2 Addendum and Assignment for our client
- IES will review the estimated settlement statement with our client
- Upon close of escrow of the replacement property, IES will wire funds to the title/escrow company to complete the real estate transaction