Orgeta Exchange

The Ortega Real Estate Exchange

1031 Exchange Service Summary

Our role: Through Ortega Real Estate Exchange, L.L.C., we provide clients access to 1031 exchange services supported by Exchange Manager Pro^SM, the patented 1031 exchange workflow technology, and one of the nation’s leading Qualified Intermediaries. Clients leveraging Ortega Real Estate Exchange, L.L.C. as the Qualified Intermediary for their 1031 Exchanges benefit from a seamless and transparent transaction by keeping more of their real estate transactions under the same roof.

Benefits of Ortega Real Estate Exchange, L.L.C.
1. In-House Coordination: We help coordinate the 1031 exchange through our team, reducing friction and increasing efficiencies.
2. Software Workflow:Patented 1031 software, Exchange Manager Pro^SM, keeps clients and advisors informed of transaction timelines, funds available, and other pertinent information throughout the 1031 exchange.
3. 1031 Exchange Expertise: Ortega Real Estate Exchange provides access to Subject Matter Expert Attorneys and Certified Exchange Specialists® (CES®)
1031 FAQ
1. What is a 1031 Exchange?
  1. A 1031 exchange, also known as a like-kind exchange or tax deferred exchange, is where real property that is “held for productive use in a trade or business or investment” is sold and the proceeds from the sale are reinvested into a like-kind property intended for business or investment use, allowing the taxpayer, or seller, to defer the capital gains tax and depreciation recapture on the transaction.
  2. The property sold as part of a 1031 exchange is the Relinquished Property. The property purchased is the Replacement Property. The real property in a 1031 exchange must be like-kind; most real estate is like-kind to all other real estate. For example, an office building could be exchanged for a rental duplex, a retail shopping center could be exchanged for farmland, etc.
  3. During a 1031 exchange, neither the taxpayer, nor an agent of the taxpayer, can receive or control the funds from the sale of the property. If a taxpayer has direct or indirect access to the funds, a 1031 exchange is no longer valid. A qualified intermediary is used to hold the proceeds of the Relinquished Property sale until it is time to transfer those proceeds for the close of the Replacement property.
  4. To be eligible for a 1031 exchange the person or entity must be a US tax paying identity. This includes individuals, partnerships, S-corporations, C-corporations, LLCs, and trusts. However, it is a requirement that the same taxpayer sells the relinquished property and purchases the replacement property for a valid exchange. 1031 exchanges were first authorized in 1921 because Congress saw the importance of people reinvesting in business assets and they wanted to encourage more of it. There have been changes and additions to the regulations that govern 1031 exchanges, and the most recent changes impacting real estate in a 1031 exchange were in 2001.

Does a vacation home qualify for a 1031 exchange?
1. One of the most common questions asked is whether or a not a vacation property qualifies for a 1031 exchange. There are three basic rules for including a vacation home in a 1031 exchange that were introduced by the IRS in 2008.
2. For a vacation home to qualify as relinquished property in a 1031 exchange, first the vacation home must have been held by the taxpayer for a minimum of 24 months immediately preceding the exchange. Second, the vacation home must have been rented at fair market value for at least 14 days in each of the 12-month periods. Third, the property owner cannot have used the vacation home personally for more than 14 days or 10% of the days the home was rented out (whichever is greater) within both 12-month periods.
3. The rules for a vacation home as a replacement property are the same as above. The property must be held for a minimum of 24 months after the close of the exchange; the property must be rented out at fair market value for at least 14 days in each 12-month period; and the taxpayer cannot use the vacation home for personal use more than 14 days or 10% of the days it was rented out (whichever is greater) in each 12-month period.
4. There is one small exception to the days a taxpayer can use both the relinquished and replacement properties, which states that the taxpayer can use the home for personal use above and beyond the 14 days or 10%, IF the overage was used to complete improvements or maintenance. If a taxpayer plans to utilize this exception, they should keep all receipts of maintenance or improvements completed during the duration of their stay, to ensure they comply with the regulations upon scrutinization.
5. Following the rules above, a vacation property can be eligibly property for a 1031 exchange. It is strongly recommended that a taxpayer contemplating a 1031 exchange involving vacation property discuss the transaction with their tax and legal counsel before doing so.
Does it make sense to do a 1031 exchange?
1. Below is a simple guide that can help determine if your situation qualifies for a 1031 exchange and if a 1031 exchange seems like the best option for your upcoming real estate transaction.
2. Do you, or your entity, pay US taxes? If yes, then you are eligible for a 1031 exchange.
3. Is the property you are selling “real property” that has been held for business or investment use? If yes, then the property should qualify for a 1031 exchange.
4. Are you planning on reinvesting the full sale proceeds from the sale of your property into another property that will be held for business or investment use? If yes, then you qualify for a 1031 exchange. However, if the answer is no, perhaps you plan to reinvest your proceeds into a second home for yourself, then the transaction would not qualify for a 1031 exchange.
5. Do you plan on reinvesting all the proceeds from the sale into a new business or an investment use property? If yes, or if you plan to reinvest the majority, then a 1031 exchange would be a good fit. If you need or want to keep most of the proceeds rather than reinvest, then a 1031 exchange wouldn’t provide a ton of value.
6. Have you already sold your property and received the proceeds? If yes, then you no longer qualify for a 1031 exchange because you already received the gain which is now taxable.
7. From the close of the sale on your property, will you be able to identify a potential replacement property within 45 days? If you think you can achieve this, then a 1031 exchange could be a great option for you!
8. Is it feasible to sell your property and acquire your new property within a 180-day period? If yes, then a 1031 exchange should be considered.
9. Your answers to the basic questions above should give you a good idea whether a 1031 exchange is a good fit for your situation or not. As always, consult your tax advisors to determine the right strategy.
How much money do you have to reinvest?
1. In order to defer ALL capital gains and depreciation recapture taxes from the sale of the Relinquished Property the taxpayer must pay an equal or higher price for the Replacement Property than the Relinquished
2. Property was sold. Should any debt or amount not be reinvested this portion, called boot, would be taxable.
3. Boot is any non-like-kind property or properties that does not qualify, which could include cash, notes, partnership interests, securities, inventory, or property held primarily for sale not investment, etc.
4. Boot is categorized in two types: cash boot, which is cash received, and mortgage boot, which is any reduction in loan or debt on the exchange. Any boot received during a 1031 exchange is subject to taxation as either depreciation recapture or capital gain.
5. It is important to note that any credits on the settlement statement directly paid out to the taxpayer may also result in boot and a taxable event. If certain situations are not handled properly in the construction and administration of the 1031 exchange it can result in credits on the settlement statement. Here are couple common situations:
  1. If earnest money is paid out of pocket by the taxpayer then they will be credited on the settlement statement. To avoid this, the earnest money should be paid by the qualified intermediary out of the exchange funds whenever possible.
  2. If the settlement statement shows credits for property taxes, security deposit, or rent prorations those would be taxable. Instead, the taxpayer should consider asking the seller to pay these items outside of the closing.
  3. In summary, to avoid a taxable event in entirety the taxpayer must reinvest equal to or greater than the value of the sale of the Relinquished Property. However, the taxpayer may take cash out, creating boot, but they will have to pay the associated taxes.
What are the Requirements and Rules for a 1031 Exchange?
1. All 1031 exchanges regardless of the type have a 45-day identification period and a 180-day exchange period.
2. For a 1031 exchange to be in accordance with IRC § 1031, within 45-days of the close of the sale of the Relinquished Property the taxpayer must identify their potential replacement property(ies) in writing to the qualified intermediary. The replacement property(ies) description must be unambiguous and specific using a physical address or legal description.
3. In relation to the 45-day identification period, there are rules that a taxpayer must follow when identifying their potential replacement property(ies). There are three distinct identification rules that the taxpayer can use, and they can choose the appropriate rule for their specific exchange situation. The three rules are as follows:
  1. 3-property Rule: A taxpayer can identify up to three properties without regard to the fair market value of the properties and they must close on at least one of the identified properties for the exchange be valid.
  2. 200% Rule: A taxpayer can identify more than three properties, but the fair market value of all properties combined cannot exceed 200% of the fair market value of the Relinquished property(ies).
  3. 95% Rule: A taxpayer can identify infinite properties, the combined value of which exceed 200% of the value of what they sold, but they must acquire at least 95% of the fair market value of the properties they identify.
4. All 1031 exchange have a 180-day time limit starting from the day of the close on the sale of the Relinquished Property. If the taxpayer has not completed the purchase of the Replacement Property before
  or on day 180, then the exchange is closed, and the taxpayer must recognize and pay taxes on the proceeds from their Relinquished Property sale. There are no extensions or exceptions available.
Who manages the 1031 Exchange Process?
1. Since 1991, IRC § 1031 has required the use of an impartial third party to hold the proceeds from the Relinquished Property sale until the close on the Replacement Property. This third party is known as a qualified intermediary.
2. Not only does the qualified intermediary hold the funds during the exchange period, but they also help structure the exchange, prepare the exchange documentation, continuously monitor and guide the taxpayer to ensure compliance of the exchange in accordance with Section 1031 at both the state and federal level.
3. While there are no federal regulations governing qualified intermediaries, with the help of the Federation of Exchange Accommodators (FEA), many states started state-level requirements to uphold high professional standards for qualified intermediaries conducting exchanges in their states. The requirements can vary state to state, but typically include some or all of the following:
  1. Minimum bond and insurance requirements
  2. Registration and licensing requirements
  3. Investment limitations on exchange funds
  4. Qualified escrow and/or trust accounts for exchanger funds
  5. Fund withdrawal authorization requirements
4. The foundation of all successful 1031 exchanges is laid by the qualified intermediary. Do your due diligence in researching qualified intermediaries to ensure you are not only getting the best service possible, but to ensure your deferred capital gains tax will hold up above IRS review.

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