Did you know that if you own land and sell an easement to that land to a government agency, it is likely that your transaction is eligible for Section 1031 exchange treatment?
Emergency Watershed Protection Program (EWPP) and Wetlands Reserve Program (WRP) easements are 
being purchased by the Iowa Department of Natural Resources and similar agencies in other states. While the owners of the land retain title to the residual value of their land after the easement is recorded, the sale of the rights to this easement can be exchanged for other real property. This is an excellent means to acquire additional acreage or investment real estate.
For a time, WRP easements were not eligible for Section 1031 exchange treatment. This was due to the fact that the assignment of the purchase agreements was not permitted in the written agreements. Purchase agreements must be assigned to the qualified intermediary for an exchange to proceed, so this prohibition effectively disallowed WRP easements from Section 1031 exchange treatment. In an effort to correct this injustice based upon a misunderstanding, this author contacted all of the Iowa congressmen, including both Senators from Iowa. On October 23rd, 2009, I received an email from Representative Leonard Boswell, a portion of which said the following:
"On October 2nd the Chief Financial Officer at USDA came out with a decision paper regarding obligations and payments for IRS 1031 exchanges. There was concern that USDA could not legally "move" an existing obligation for an easement to a new party.
"Based on discussions with the Office of General Council, the obligation was originally with the landowner, who had the legal ability to assign their rights to a second party. Once NRCS approves this assignment, it would also include the right to the payment for the easement. However, the underlying obligation remains with the landowner and they are making an adjustment in the financial system as an "alternate payee". You will be pleased to know that USDA has resumed 1031 exchanges."
The essence of these comments indicates that the USDA originally thought that by assigning the agreements to an intermediary for a Section 1031 exchange, the obligation of the easement would also be transferred. Although that was never true, it took some time for the USDA to satisfy itself on the fact. Now that they are comfortable with the situation, Section 1031 exchanges are again allowable for WRP easement sales.
If you would like additional information about this subject, please contact us. We are handling a number of Section 1031 exchanges right now for other easement sellers.
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Please consider IOWA EQUITY EXCHANGE as your trusted source for answers to your questions about Section 1031 like-kind tax-deferred exchanges. Contact us at your convenience for prompt, accurate information. Please think of us for your next exchange.
Ken Tharp
800-805-1031 toll free
Providing Qualified Intermediary services for Section 1031 tax deferred exchanges all over the United States. Headquartered in Iowa, our services are available in Missouri, Kansas, Nebraska, Colorado, North Dakota, South Dakota, Minnesota, Wisconsin, Illinois, and all other states.
INTEGRITY. PRECISION. SECURITY.
Copyright © 2009 By Ken Tharp, All Rights Reserved. * Section 1031 Exchanges and Conservation Easements * Contact Ken Tharp for information on Section 1031 tax-deferred exchanges anywhere in the United States.
You'd think it would be fairly simple to list the requirements to defer the maximum amount of capital gain taxes through the use of a Section 1031 exchange. As I set out to write this article, though, I realize that like a lot of other aspects of exchanges, it takes a little thought and effort to describe things accurately.
One-hundred percent deferral of all capital gain taxes is pretty difficult to achieve, but we can all get close to 100% if we watch things closely. The two primary requirements for maximum deferral are these:
1. Buy property with value equal to or greater than the value of the property you sold in the exchange. (In exchange lingo, we say "Trade up or equal.")
2. If you had debt on the property you sold, you should have debt equal to or greater than that amount on the new property. (In exchange parlance, it's "Mortgage up or equal.")
Already, there's a exception to point out. In item #2 above, mortgage debt can be offset by cash contributions. In other words, if you want to have less debt on the new property than the old one, you can accomplish that and preserve your tax deferral by putting up more equity (cash) out of your pocket. Example: Old property value = $100,000; debt on old property = $50,000. New property value = $100,000; debt on new property = $30,000. Obviously, there's $20,000 that has to come from somewhere, probably your pocket. Assuming the $20,000 comes from you, your cash offsets your old debt and you have preserved the deferral of taxes on that amount. You haven't "mortgaged up or equal," but you've offset your mortgage with cash.
Some people think that the next requirement for maximum tax deferral is pretty obvious, and I suppose they're right. I still like to say it when I'm talking about maximizing your deferral, though. It is this:
3. Allow all of the proceeds from the sale of your old property to go into your exchange account, and use all of those proceeds in the new property.
In other words, if you don't use all of your sale proceeds in the new property, you're going to create a tax liability on anything you accept and don't use in that manner.
The last requirement is also pretty evident, but still is worthy of mention:
4. Conduct your exchange within the Safe Harbor of Section 1031 law.
Use an intermediary for your exchange. Have your exchange paperwork in place prior to the closing on the property you're selling. Identify your replacement property in the proper manner within the 45-day window allowed. Wrap up the closing of your replacement property before the end of the 180-day exchange period. And so forth.
Going one step further... you may have noticed that I have not ever referred to "full tax deferral" above. There are some items that appear on most closing statements that are not possible to avoid. If you are using a loan for part of the purchase price of the new property, there will likely be some expenses that relate to that loan that are not considered "exchange expenses." Among those expenses are such things as:
We advise our clients and their closing agents to settle tax prorations, security deposit tranfers, and any rent prorations outside of closing. Sometimes they do and sometimes they don't. When they don't, again, those are costs that are not considered exchange expenses.
And lastly, keep in mind that no one forces you to maximize your tax deferral. If you wish to receive some of the proceeds of the sale and are willing to accept the tax liability for doing so, you are certainly entitled to doing so.
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Please consider IOWA EQUITY EXCHANGE as your trusted source for answers to your questions about Section 1031 like-kind tax-deferred exchanges. Contact us at your convenience for prompt, accurate information. Please think of us for your next exchange.
Ken Tharp
800-805-1031 toll free
Providing Qualified Intermediary services for Section 1031 tax deferred exchanges all over the United States. Headquartered in Iowa, our services are available in Missouri, Kansas, Nebraska, Colorado, North Dakota, South Dakota, Minnesota, Wisconsin, Illinois, and all other states.
INTEGRITY. PRECISION. SECURITY.
Copyright © 2009 By Ken Tharp, All Rights Reserved. * The Requirements for Maximum Tax Deferral * Contact Ken Tharp for information on Section 1031 tax-deferred exchanges anywhere in the United States.
Many people hear the term "like-kind" when they're talking about Section 1031 exchanges and they start to panic. Please, relax! I've got an easy way for you to figure out whether two properties are like-kind to each other for purposes of exchanging. 
First of all, a caveat... the easy way only applies to real estate exchanges. I'll talk more about other types of exchanges later, but suffice it to say that it is more difficult to determine like-kind status in those exchanges. With real estate, however, it's pretty simple. I've heard other exchange people say, "All real estate is like-kind to all real estate." In my opinion, that simplifies things a little too much, and I'll give you an example why later.
For the meantime, here is the secret to determining whether a piece of real estate is like-kind to another piece of real estate within the exchange context: Ask yourself (or your client, if you are a real estate, tax, or legal professional) these questions:
If you (or your client) can answer, "Yes" to both of those questions and can substantiate his or her answer, the two properties are like-kind for purposes of exchanging.
Is a farm like-kind to an apartment building? In the vast majority of cases, the answer is yes. Is a rental house like-kind to a small-town office building? In the vast majority of cases, the answer is yes. Is a single-family home that was purchased with the intention of fixing up and reselling like-kind to a duplex? AHA! Here's an example of why all real estate is NOT like-kind to all real estate. Clearly the single-family home being rehabbed is real estate, but the IRS considers this property to be inventory in a business and not something that was purchased with the intention of being held for investment. I can hear you arguing "This was an investment!! I invested my hard-earned dollars to buy the house and now I'm investing my hard-earned dollars to fix up the place. Why doesn't that make it an investment??!?" A solid argument, I will admit, but one which you will lose when you face the IRS examiner.
It all comes down to the intent. Did you buy the property you are now selling with the intention of holding it as an investment? No, your intention was to fix it up and sell it. So it does not qualify for a Section 1031 exchange.
I promised to talk about non-real-estate exchanges, but this has already gotten a little lengthy. Let me bring this to a close by saying that the exchanges of business assets, etc. require a much higher standard when determining like-kind status. The IRS uses Asset Classes and Product Classes to determine whether two items are like-kind. The items must fall within the same class to qualify. I will write an article on busines asset exchanges in the future and address this issue more thoroughly. For now, just remember the two questions and you will be set!
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Please consider IOWA EQUITY EXCHANGE as your trusted source for answers to your questions about Section 1031 like-kind tax-deferred exchanges. Contact us at your convenience for prompt, accurate information. Please think of us for your next exchange.
Ken Tharp
800-805-1031 toll free
Providing Qualified Intermediary services for Section 1031 tax deferred exchanges all over the United States. Headquartered in Iowa, our services are available in Missouri, Kansas, Nebraska, Colorado, North Dakota, South Dakota, Minnesota, Wisconsin, Illinois, and all other states.
INTEGRITY. PRECISION. SECURITY.
Copyright © 2009 By Ken Tharp, All Rights Reserved. * Defining the Exchange Term "Like-Kind" * Contact Ken Tharp for information on Section 1031 tax-deferred exchanges anywhere in the United States.
Occasionally a client will ask that question, and we can usually answer, "YES!" It does depend upon exactly what the client's plans and intentions are, but in general, the replacement property in a Section 1031 exchange can be newly constructed during the exchange or substantially improved during the exchange. Here are the details:
Let's assume that an exchanger has sold his relinquished property and plans to construct a new duplex on a lot that he intends to purchase through his 1031 exchange. A key thing to remember is that once the exchanger takes title to the replacement property, any funds remaining in the exchange account will be 
transferred to the exchanger and will be taxable! Therefore, the improvements must be structured within the exchange in some way. The process to do this is by using an Exchange Accommodation Titleholder ("EAT") to hold title to the land until the exchange is complete. There is some similarity, then, to a Reverse Exchange in that the exchanger cannot hold title to both the relinquished property and the replacement property at the same time and must use an EAT.
In practice, how does this work? Consider this typical sequence of events:
The process is identical if the exchanger wishes to purchase a property and add substantial improvements within his exchange.
The primary hurdle to the construction/improvement exchange is that of timing, which can be a concern in this type of exchange. Both the 45-day Identification Period and the 180-day Exchange Period still apply. The property to be purchased must be unambiguously identified during the 45-day ID period. This means that construction must either be completed during the 180-day exchange period, meaning the identification will be that of a fully-completed building OR the exchanger must be able to see into the future and accurately describe how far along the construction process will be by the end of the 180-day period. By using the 3-Property Rule for identification, it is possible to identify the property in three different stages of completion to somewhat circumvent this obstacle.
Construction/improvement exchanges carry a significantly higher fee than standard exchanges. This is due to the need to create and administer an LLC, plus the additional time requirements of handling payments to contractors during the construction phase. Contact us for details on fees.
Just as every other Section 1031 exchange has its unique qualities, so does every construction/improvement exchange. Construction and improvement exchanges are an extremely valuable tool that can allow the exchanger to end up with just the property that he or she desires. If you have general or specific questions about the process, please feel welcome to get in touch.
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Please consider IOWA EQUITY EXCHANGE as your trusted source for answers to your questions about Section 1031 like-kind tax-deferred exchanges. Contact us at your convenience for prompt, accurate information. Please think of us for your next exchange.
Ken Tharp
800-805-1031 toll free
Providing Qualified Intermediary services for Section 1031 tax deferred exchanges all over the United States. Headquartered in Iowa, our services are available in Missouri, Kansas, Nebraska, Colorado, North Dakota, South Dakota, Minnesota, Wisconsin, Illinois, and all other states.
INTEGRITY. PRECISION. SECURITY.
Copyright © 2009 By Ken Tharp, All Rights Reserved. * Can I Use a Section 1031 Exchange to Build or Improve a Property? * Contact Ken Tharp for information on Section 1031 tax-deferred exchanges anywhere in the United States.
Granted, a title of "Government 101" likely doesn't draw in many readers. I hope that the subtext indicating that the information isn't boring will encourage a few folks to take a look at this fantastic video.
Have you ever wondered about the origins of our republic? Why it is such an incredible structure? What it is that we will lose if we are not vigilant? I stumbled onto a blog yesterday by Jeff Williams of Four Legaci
es Mortgage in West Des Moines, Iowa. His blog is called The Money Clip. There's lots of great information there, but this video caught my attention. The video is called The American Form of Government. It's about ten and a half minutes long. Invest the time to be reminded of what you learned back in government class (if you as old as I am, that is; I'm not sure what they teach these days). You will not regret it!!
CLICK HERE FOR THE VIDEO: The American Form of Government
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Please consider IOWA EQUITY EXCHANGE as your trusted source for answers to your questions about Section 1031 like-kind tax-deferred exchanges. Contact us at your convenience for prompt, accurate information. Please think of us for your next exchange.
Ken Tharp
800-805-1031 toll free
Providing Qualified Intermediary services for Section 1031 tax deferred exchanges all over the United States. Headquartered in Iowa, our services are available in Missouri, Kansas, Nebraska, Colorado, North Dakota, South Dakota, Minnesota, Wisconsin, Illinois, and all other states.
INTEGRITY. PRECISION. SECURITY.
Copyright © 2009 By Ken Tharp, All Rights Reserved. * Iowa Landlord Association Spring Educational Seminar & Trade Show * Contact Ken Tharp for information on Section 1031 tax-deferred exchanges anywhere in the United States.
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Iowa Equity Exchange is a nationwide, trusted provider of Qualified Intermediary services for all types of Section 1031 tax-deferred exchanges. Free consultation about potential exchange transactions.
IOWA EQUITY EXCHANGE meets the needs of investors and business owners who desire to defer capital gain taxes on real estate transactions involving property held for investment or used in a business. We provide Qualified Intermediary services for tax-deferred exchanges throughout the United States. All exchange structures are supported and available through Iowa Equity Exchange: delayed exchanges, reverse exchanges, improvement/construction exchanges, business asset exchanges, and parking exchanges.
Ken Tharp established Iowa Equity Exchange to serve investors of all levels of expertise and experience. He has been a real estate investor himself since 1979. During the past thirty-plus years, Ken has been involved in virtually all areas of real estate – including sales, new construction, property management, and extensive renovations. After personal experience in a number of §1031 tax-deferred exchanges, it became a passion to expose this invaluable process to as many others as possible—thus was born Iowa Equity Exchange.
At Iowa Equity Exchange, our commitment is to provide investors, business owners, and real estate professionals with the highest level of expertise. Security is available for every dollar of your funds while they are held in trust. We pledge to maintain the integrity of every exchange.
A “Qualified Intermediary” has the very specific role of guiding the investor through a §1031 exchange. We inform the exchanger of exchange requirements, produce the necessary exchange documents, provide the critical time monitoring procedures required, and manage the investor’s funds while in our possession. We are not engaged in the practice of law or accounting; we urge all clients to discuss the matter of exchanging with their trusted advisers. We will be happy to join in those discussions if desired by the parties.
If you are interested in learning more about Section 1031 tax-deferred exchanges, there is a lot of information on our web site, www.iowaequityexchange.com.
IOWA EQUITY EXCHANGE. INTEGRITY. PRECISION. SECURITY.
Our Mission Statement: Iowa Equity Exchange exists to provide Qualified Intermediary services, but to do so with the utmost of integrity in our actions, precision in our documentation, and security for our clients’ funds.
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Iowa Equity Exchange Is a proud member of the Federation of Exchange Accommodators, the only trade association dedicated to the representation of professionals who conduct like-kind exchanges under Section 1031 of the Internal Revenue Code.
Members of the Federation of Exchange Accommodators must read and agree to abide by a rigorous Code of Ethics that can be found at the association's web site, www.1031.org.
In addition to the FEA, Ken Tharp is a contributing blogger to the American Apartment Owners Association, a member of the Iowa Commercial Real Estate Association, the Two Rivers Real Estate Investors Association, and the Iowa Landlord Association. Ken speaks frequently to real estate investor associations, real estate company meetings, various Boards of REALTORS®, and a variety of other organizations.
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Testimonials
"Excellent service, I would highly recommend for a 1031 exchange."
David Elgin, West Des Moines, IA, 2/4/09
“I am so glad I decided to work with you on these exchanges. I just want to let you know that everyone who has been involved and in contact with you has expressed excessively how nice you are to explain everything to them as the process progresses and how patient you have been with all of us who are ignorant of this business. You have made this so easy for everyone involved. Thank you from the depth of my heart. With all of my hysteria about the whole sale transaction, you have been the one smooth factor I could count on.”
Lora J, Coralville, IA 1/22/09
“Thanks for your prompt attention to all of our paperwork and your very clear instructions. This could have been complex and cumbersome, but you made it smooth and easy.”
Jean I, Olympia, WA 1/22/09
“Excellent work, I didn’t have to worry once. Ken made a very smooth transaction out of this and I’m very grateful. Will do business again with Iowa Equity Exchange.”
Frank S, Pleasant Hill, IA 12/5/08
“We work with Ken directly as our sole source for 1031 exchanges involving our clients. Ken's ability to give direction on where our clients need to head financially with property exchanges is an asset that we are very proud to offer at LandAndGame.com. The opportunity to work with Ken has been a real blessing for our business and will allow to us increase the bottom line for our clients investments across the board. In short, if you're an active investor in farm ground, hunting land with income, or duplexes and apartments, your time spent with Ken will pay dividends exponentially in your property portfolio."
Rod White, owner, LandandGame.com
“I first worked with Ken in 2007 after meeting him online. As a real estate agent and auctioneer serving my clients needs well is important to me. Ken spent hours on the phone with me taking the mystery out of 1031 equity exchanges and putting them in EASY to understand terms. I refer ALL of my 1031 exchange clients to Ken because he has taken EXCELLENT care of every client I have ever sent him. He is in my opinion the best in the business. He makes it so easy!”
Jason Smith, Land Specialist and Auctioneer, Loess Hills Land
"I contacted three 1031 exchange companies before selecting Iowa Equity Exchange for my 1031 exchange. Ken Tharp of Iowa Equity Exchange seemed to be the most knowledgeable person and was willing to answer all of the questions that I had about 1031 exchanges. The 1031 exchange went smoothly following the guidance provided by Ken Tharp.
Max Peterson, Stanton, Iowa, 6/8/08
“As a banker, I found your service to be very helpful.”
Paula Sears
“Being a new [real estate] agent, I’ve not dealt with 1031 exchanges yet. I found your presentation to be both informative and easy to understand.”
Rachelle Bryan
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Here is a screen shot of our advertising campaign currently appearing in Homes and Land magazine, Iowa Lawyer, the Iowa Society of CPAs publication, and a couple of other places.
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