Independent Exchange Services, Inc. provides IRS Section 1031 exchange services—essentially a deferral of capital gains taxes from the exchange of investment properties—for real estate investors throughout the Greater Bay Area and beyond. The company acts as a third party, qualified intermediary for various types of exchanges, including delayed, simultaneous, reverse, built-to-suit and international.
President Ian Bunje says the company strives to be as service-driven as possible and make the exchange process simple and hassle-free for its clients. “We know each person’s questions, problems and issues differ, so we tailor each transaction to meet those specific needs.”
The company operates as part of the 1031 Strategies & Services Group. It’s a boutique exchange firm, which means it doesn’t handle thousands of transactions a year and is able to take a personalized approach to dealing with its clients. For more information on the company’s services or 1031 exchanges in general, Mr. Bunje invites potential clients to visit 1031pro.com.
“Most of our business comes from word-of-mouth referrals from past customers, lawyers, accountants and even our competition, so we make sure each client’s exchanges receive as much attention as everyone else’s, no matter the size. We strive to be as hands-on as possible, and we offer each client the same high level of customer service, whether we’re quickly responding to their phone calls and emails or putting the finishing touches on their deal.”
Before committing to an IRS Section 1031 exchange, it’s important to understand the basics. “1031 exchanges allow you to defer taxes on capital gains from the sale of investment properties if all the proceeds are promptly invested in replacement properties,” explains Ian Bunje, co-owner of Independent Exchange Services, Inc. in San Francisco. “Basically, you’re deferring the taxes until you sell the new property.” To get the most out of a 1031 exchange, it’s best to employ the services of a professional intermediary, but there are still some basic things you should know before making the initial call.
A 1031 exchange isn’t for personal use. The provision is only for investment and business properties, so you can’t swap your primary residence for another home. There are ways you can use a 1031 for swapping vacation homes, but this loophole is much narrower than it used to be. Some exchanges of personal property (like a painting) can qualify, but exchanges of corporate stock or partnership interests can’t.
“Like kind” is a rather broad phrase. Most exchanges must merely be of like kind, which doesn’t mean what most people think it means. You can exchange an apartment building for raw land, a ranch for a strip mall, or even one business for another.
Consider a delayed exchange. Classically, an exchange involves a simple swap of one property for another between two people. But the odds of finding someone with the exact property you want who wants the exact property you have are slim. For that reason, the vast majority of exchanges are delayed, three party or “Starker” exchanges (named for the first tax case that allowed them). In a delayed exchange, you need a middleman who holds the cash after you sell your property and uses it to buy the replacement property for you.
Designate replacement property. Once the sale of your property occurs, the intermediary will receive the cash—you can’t receive the cash or it will spoil the 1031 treatment. Also, within 45 days of the sale of your property, you must designate replacement property to the intermediary in writing, specifying the property you want to acquire. There’s debate about how many properties you can designate and what conditions you can impose. The IRS says you can designate three properties as the designated replacement property as long as you eventually close on one of them. Alternatively, you can designate more properties if you come within certain valuation tests. For example, you can designate an unlimited number of potential replacement properties as long as the fair market value of the replacement properties doesn’t exceed 200 percent of the aggregate fair market value of all the exchanged properties.
You must close within six months. The 180-day countdown starts right when the sale of your property closes. If you designate replacement property exactly 45 days later, you’ll have 135 days left to close.
If you receive cash, it’s taxed. You may have cash left over after the intermediary acquires the replacement property. If so, the intermediary will pay it to you at the end of the 180 days. That cash, also known as “boot,” will be taxed as partial sales proceeds from the sale of your property, generally as a capital gain.
Consider mortgages and other debt. One of the main ways people get into trouble with 1031 transactions is failing to consider loans or any debt on the replacement property. If you don’t receive cash back but your liability goes down, that too will be treated as your income, just like cash. Suppose you had a mortgage of $1 million on the old property, but your mortgage on the new property you receive in exchange is only $900,000. You have $100,000 of gain that’s also classified as boot, and it’ll be taxed.
Intermediaries are always looking for ways to discern themselves from their competition, and those that have earned the prestigious Diamond Certified award are already several steps ahead. In addition to its Diamond Certified status, Independent Exchange Services, Inc. differentiates itself by focusing entirely on one specific aspect of the industry: Section 1031 exchanges. “Essentially, we help investors defer payment of capital gains taxes that result from the buying and selling of investment properties,” explains co-owner Ian Bunje. “Section 1031 of the U.S. Tax Code allows taxpayers to invest this type of equity into replacement properties, and our certified exchange specialists and certified public accountants are trained to help them facilitate those exchanges.”
Independent Exchange Services has been providing Section 1031 exchange services for real estate investors throughout the Greater Bay Area and beyond since 1980, and its decades of experience have given it a unique perspective on how to best handle the intermediary process. “We’ve been doing this longer than just about any other company, and that’s translated into a high level of expertise that allows us to really focus on our customers,” says Mr. Bunje. “We like to sit down and get to know them instead of just gathering information and processing documents. We also understand that real estate transactions don’t just happen Monday through Friday, so we’re available every day of the week.”
To add to its customer-oriented approach to doing business, Independent Exchange Services is quick to inform clients of what services it can’t provide in addition to what it can. “For example, we can’t act as a tax advisor, but we’ll make sure every detail is covered so the exchange meets all IRS requirements,” says Mr. Bunje. “If we see something that doesn’t look right, we’ll raise a flag to ensure the client contacts the right people and makes the right decision. For us, it’s not just about collecting a fee—if the deal won’t benefit the client, we won’t go through with the transaction. We want our clients to come back a second and third time. Ultimately, they have to benefit from our services, not the other way around.”