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The Best Deeding Method to Use in 1031 Tax Deferred Exchanges

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By Jack Sternberg Category: 0

Submit your Articles Here!

certainapproval@aol.com.


Best regards

Jack Sternberg
http://www.askjacksternberg.com

The Best Deeding Method to Use in 1031 Tax Deferred Exchanges
In this article, I'd like to define two real estate
terms—direct deeding and sequential deeding—and
show the best form to use with 1031 Tax Deferred Exchanges.

If you're not familiar with the "1031," this law allows the
exchange of investment or business property for other
investment or business property, without paying tax (it's
deferred) if the property received is "like kind."

As you'll see below, direct deeding is the better choice in
this situation, but it's important to understand the
difference between the two options so you're armed with
full knowledge when you enter into a 1031 Exchange.

Direct Deeding and Sequential Deeding

Direct deeding is a process of deeding property directly to
the buyer rather than to an intermediary (the initial
common method in 1031 tax deferred exchanges). The seller
of the property deeds his or her property directly to the
buyer, skipping the deed to an intermediary.

In 1990, the IRS ruled that it was no longer necessary to
use "sequential" deeding in a tax-deferred exchange
transaction. With the sequential deeding method, the
seller's deed is given to an intermediary who then deeds
the property to the buyer.

Most property transfers in tax-deferred exchanges today use
"direct deeding" rather than "sequential deeding."

The Advantages of Direct Deeding Over Sequential Deeding

Under sequential deeding, the intermediary is exposed to
the risk of liability (asbestos, environmental hazards,
etc.) for the short time they hold title. Direct deeding
reduces those risks.

Another advantage of direct deeding is cost savings. It
eliminates the payment of duplicate transfer taxes which
are normally charged each time a deed is recorded.

Safeguards To Follow in the Direct Deeding Process

It's a necessity to use a fully qualified intermediary.
Check ahead of time so you know that the intermediary is
qualified and has experience. You definitely don't want a
"newbie" or an incompetent handling a 1031 transaction.

As a seller, ensure that the intermediary has an agreement
with your buyer for the transfer of the property to be
exchanged.

As a buyer, make sure that the intermediary has an
agreement with the seller of the property which allows for
the transfer of that replacement property to you.

Additional Information On Intermediaries

All parties to the agreement must be notified in writing of
your intention to use an intermediary in the exchange. In
typical cases, the qualified intermediary in your exchange
is affiliated with a title or escrow company. The title or
escrow company provides all the services required to handle
the closing; e.g., title insurance, escrow services, and
document preparation and transfers, etc.

There are several advantages to using a professional
intermediary in a 1031 exchange, including:

Reduction of the potential liability for the structure of
the exchange and any tax consequences.

Shielding of the principals from accepting additional
liability.

Provision of a paper trail by way of the assignments and
exchange agreements.

The 1031 Tax-Deferred Exchange is a great mechanism for
deferring taxes. However, it can be a complicated process,
so it's best to be fully-informed on these transactions.

Key Point: If you're new to 1031s, absolutely seek the
advice of a tax professional who's experienced in exchanges!

Jack Sternberg


----------------------------------------------------
Jack Sternberg is a nationally recognized expert on real
estate investment who's been in the business for more than
30 years. Sternberg's deals have totaled over $750 million
and he's been to the closing table more than 1,500 times.
For more, visit http://www.askjacksternberg.com


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